I’ve long been skeptical of GHG offsets, even though they can – when properly verified and used – have a place in corporate carbon risk management as a solution of last resort. However, that isn’t always how it plays out. Two articles – one about an offset provider in the US and one about Australia’s offset market – are recent high profile examples of why I continue to be concerned.
US company earned $53 million from non-additional offset projects
“There’s a distinct possibility that a great deal of existing carbon offsets are effectively fake.”Robert Mendelsohn, Yale professor of forest policy and economics
The first article is a confession from Jim Hourdequin, the chief executive officer of privately held Lyme Timber Co., which managed timberland and sold offsets over a 10 year period.
“The problem with carbon markets, he says, is that weak rules have created strong incentives for landowners to develop offset projects that don’t actually change the way forests are managed, and therefore do little to help the climate. Most forest carbon projects, including some from Lyme, fall into this category…
When a carbon project developer informed Lyme … that it could sell carbon credits on the already protected land, Hourdequin could scarcely believe it. After all, the company had already been compensated to safeguard the forest. It was legally prohibited from cutting any of the trees. Any carbon revenue it received would have zero impact on the atmosphere.
One deal netted Lyme about $20 million for minor changes to a forest in West Virginia. After purchasing a huge hardwood forest there in 2017, it put together a carbon project on 47,000 acres of forbidding terrain. Some of the land is so rugged and steep, Hourdequin says, the trees can be extracted only by helicopter, which is prohibitively expensive. Nonetheless, California’s carbon market would pay Lyme handsomely to preserve these little-threatened trees. To entice landowners with richly stocked forests, California gives valuable upfront credits for these bigger-than-average trees. The landowner must then preserve this larger volume for a century—seemingly a win for the climate. For Lyme, though, $20 million wasn’t necessary to maintain this higher volume of trees, because it didn’t make economic sense to cut them. ‘Society probably didn’t need to pay us for that,’ Hourdequin says.”
Hourdequin reported that he changed his business model to now sell only “real” offsets, but that means a dramatically higher price of $60/ton. The combination of widely available cheaper (and low quality) offsets and the lack of risk many companies feel about Net Zero commitments (frequently only used for PR/marketing purposes) means that
“… $60 per ton was ‘substantially out of market’… Big offset buyers haven’t exactly jumped at Lyme’s new $60 credits. The company pitched its project to a major bank, which Hourdequin won’t identify. The bank declined. Hourdequin then discussed the idea with a couple of large tech companies. One praised his speech and expressed an interest in future collaboration, but both companies have thus far demurred.”
Australian regulator attacks carbon market as a fraud
The growing carbon market overseen by the government and the Clean Energy Regulator was ‘largely a sham’ as most of the carbon credits approved did not represent real or new cuts in greenhouse gas emissions.Prof Andrew Macintosh, former head of Australia’s Emissions Reduction Assurance Committee
Andrew Macintosh was a key contributor to developing the Australian government’s carbon credit system but has now come out “describing it as a fraud that is hurting the environment and has wasted more than $1bn in taxpayer funding.”
“Macintosh, an environment law and policy professor at the Australian National University, said all major methods approved by the government to create carbon credits had ‘serious integrity issues, either in their design or the way they are being administered’…
The researchers also found problems with projects at landfill sites that are awarded credits for capturing methane – a potent greenhouse gas released from waste – and using it to run on-site electricity generators. Macintosh said nearly two-thirds of the claimed cuts in emissions would have happened anyway because the power projects were economically viable without carbon credit revenue. It meant the carbon credits generated did not represent ‘additional’ cuts in emissions, as required under law.
People are getting credits for not clearing forests that were never going to be cleared, they are getting credits for growing trees that are already there, they are getting credits for growing forests in places that will never sustain permanent forests and they are getting credits for operating electricity generators at large landfills that would have operated anyway.”
What This Means
Offsets were intended to be a tool of last resort – only applied when direct emissions reductions weren’t possible. They are now being used/overly-relied on to the detriment of all involved in the carbon offset market. Companies should acknowledge there are meaningful risks to them when buying offsets. This is an area where price may well be an indicator of quality – caveat emptor. It would be prudent to consider rigorous due diligence on planned offset purchases using qualified and experienced professionals. Periodic reviews of existing offsets may also be worthwhile. Advisory Board member Mark Trexler wrote this primer for us last year and today offers his thoughts on what carbon offset due diligence should include. Due diligence like this should also be considered in mergers and acquisitions to help prevent unpleasant surprises after the deal.