Companies dropping carbon offsets but still buying the worst ones, analysis shows

NEW YORK – Carbon offsets once looked primed for unstoppable growth. Analysts had forecast the credits, which claim to wipe out a tonne of emissions, would be worth hundreds of billions of dollars in the coming years. But companies are starting to cool on the market as it faces increasingly sharp criticism from scientists and experts.

Purchases by banks, airlines, industrial heavyweights and other businesses fell for the first time in 2022, according to Bloomberg Green’s analysis of data in three public registries covering more than 260,000 transactions since 2010.

The 17 per cent drop in demand for all offsets in 2022 from 2021 doesn’t reflect the impact from more negative events in 2023, such as the collapse of the Kariba Redd+ forest conservation project in Zimbabwe and revelations of questionable practices within the unregulated industry.

South Pole, the world’s leading seller of carbon offsets, announced in October that it had pulled out of the Kariba project following allegations of exaggerated claims. The project – one of the world’s largest forest conversation schemes – has generated millions of carbon credits from efforts to prevent deforestation around Lake Kariba.

Within this shifting trajectory for the carbon market and growing questions about its efficacy, buyers haven’t necessarily been switching to higher-quality offsets. Even as transactions declined in 2022, corporate buyers increased purchases of offsets derived from a particularly controversial source – wind, hydro and solar projects.

Most experts have written off these renewable energy credits because power from these sources is already the cheapest option in most parts of the world. That means any extra funding from the sale of carbon offsets won’t move the needle on emissions.

Renewable-energy offsets made up about half of all purchases in 2022, up from 38 per cent in 2021. That increase surprised Dr Lambert Schneider, a carbon markets expert at the German non-profit Öko-Institut. “It’s really well-known today that these credits have serious integrity issues,” he said.

Some of the biggest corporate buyers have begun to distance themselves from such offsets. The British budget airline EasyJet said in September 2022 that it would stop using most carbon credits to reach its goal of zeroing out carbon emissions by mid-century. Instead, the airline would focus on finding ways to reduce pollution from its operations, such as investing in sustainable aviation fuel or hydrogen technology.

But that hasn’t stopped the airline from offering the same offsets directly to its customers. On a website jointly run by EasyJet and South Pole, visitors can calculate the carbon footprint of their flights and purchase credits to make up for those emissions. One of the projects that customers can support is a wind farm in Argentina, for £5 (S$8) a tonne of CO2 equivalent. (South Pole’s chief executive recently stepped down following months of allegations about its business practices, including an investigation by Bloomberg Green.)

EasyJet doesn’t make any revenue from these sales and won’t deduct any carbon from its own emissions ledger, according to a company spokesperson. “We know some customers would like the option to use carbon offsetting, and so we simply offer customers the option to voluntarily offset their flight,” the spokesperson said.

Chinese tech firm Lenovo Group also dropped offsets from its net-zero plan but sells them “as a service”, according to a spokesperson who described them as “tools for customers wanting to do more”. JetBlue Airways has also ditched most offsets for its own domestic emissions but offers a similar service via a third-party platform. It’s also set up a new platform to let passengers buy sustainable aviation fuel. JetBlue and Lenovo said Bloomberg’s data analysis doesn’t accurately reflect their offsetting strategy.

In other words, the companies decided some offsets weren’t good enough to meet their own climate goals – and yet have continued selling them to customers as a feel-good solution. “It’s often a lie because the credits don’t represent their claimed emissions reductions,” said Dr Barbara Haya, director at the Berkeley Carbon Trading Project. “The whole idea that you could fly and drive a gas car guilt-free is simply not accurate.”

The contradictory moves show how the market for carbon offsets has become a headache for companies that bought into the alluring premise that they could continue emitting carbon as long as they purchased these cheap credits in return.

The problem is that the bulk of offsets available today don’t remove carbon dioxide from the atmosphere, they only purport to avoid releasing more CO2. That undermines the fundamental idea behind offsetting: you take one molecule of CO2 out of the global total for every molecule you put in.

On top of that, journalists and non-profits have unearthed problems with dozens of projects all over the world, ranging from false promises to profiteering by middlemen and coercive tactics used to secure land and cooperation from local communities.

Just a few years ago, so many businesses were banking on offsets as a climate solution that demand was projected to skyrocket. A task force of companies and sustainability experts seeking to grow the market forecast in 2021 that it could be worth US$100 billion (S$134 billion) by the end of the decade. Barclays has since put the figure at US$250 billion. The outlook is so uncertain that BloombergNEF says offsets could make anywhere between US$15 billion by 2030 and even a mind-boggling US$1 trillion by 2037 if carbon-removal technologies take off.

But the recent developments have made buyers more cautious. “What we’ve seen over the last year in voluntary carbon markets is an erosion of confidence on the corporate side,” said Mr Eron Bloomgarden, founder of Emergent, a non-profit that facilitates offsets trading. An analysis by Carbon Direct, a carbon management firm, said “reputational backlash” against buyers of poor-quality credits – coupled with global macroeconomic headwinds – will probably further decrease usage in 2023.

Purchases driven primarily by branding – such as companies which use offsets to label certain products “carbon neutral” or “net-zero” – are now forecast by BloombergNEF to fade away entirely by mid-century. At the same time, many companies with net-zero goals will still rely on offsets to address the last sliver of emissions that can’t be eliminated through new technologies or operational changes. BloombergNEF puts that demand at 1.1 billion tonnes by 2030 and 5.4 billion tonnes by 2050.

“No company can reach net-zero – a goal thousands of corporations are striving for – without carbon offsets,” said Mr Kyle Harrison, head of sustainability research at BloombergNEF.

Many companies are already pledging that they will shift their purchases to more expensive offsets that go to projects which remove CO2 from the atmosphere, either through planting trees or facilities that capture carbon from the air. But some businesses have been slower to adapt.

At least half of the carbon offsets used in 2022 couldn’t be attributed back to a buyer. Still, the public databases list the names of hundreds of companies that continue to purchase credits and make bold climate claims.

Bloomberg Green contacted dozens of the biggest companies that made some of the largest renewable offset purchases. Responses fell into three broad categories: ditching offset use, investing directly in projects to boost oversight, and doubling down. Many declined to comment.

Unlike some of their peers, Etsy and Estee Lauder are among the large companies that continue to use offsets to underpin claims of “carbon neutrality.” Others, including TotalEnergies, are developing their own green projects in the hopes that they’ll have better oversight.

These initiatives haven’t always panned out. Volkswagen teamed up with environmental consultancy ClimatePartner to generate offsets, so it can be “independent from the market where you can’t control what’s effective and what’s not,” said Ms Esra Aydin, a spokesperson for the automaker. But the credits didn’t materialise in time in 2022, and it ended up going back to the voluntary market where cheap renewable-energy credits were the only ones that worked with its budget.

Some of the companies that defended the use of offsets pointed to globally recognised benchmarks and disputed criticism that some projects don’t result in significant changes to the climate. Banco Votorantim, the seventh largest bank in Brazil, said it aimed to only acquire credits tied to certain standards and from various technologies. A Telstra spokesperson disputed “the premise that all renewable offsets are ‘junk’,” and said the company will continue to explore projects that “both remove carbon and provide biodiversity outcomes”.

Some buyers are banking on new standards to bolster the market’s credibility, such as recently published guidelines by the ICVCM, an industry-led group. Negotiators at the upcoming United Nations-backed COP28 climate summit in Dubai will debate rules that could grow a separate market for offsets that are traded between countries.

Until then, the industry faces new pressures. A class-action lawsuit targeting Delta’s former carbon-neutral claim could set a precedent that threatens other companies. US regulators have launched a rare call for whistleblowers to help root out fraud in the market, and the European Union recently agreed on rules to ban misleading environmental marketing.

After two decades of research on the carbon market, experts like Dr Schneider and Dr Haya are pessimistic that things will improve. “You have large amounts of uncertainty that’s being deliberated by a set of market players that all benefit from more credits,” said Dr Haya. “It’s really hard to rein that back. The market has disproved itself, and we need to move on to something different.” BLOOMBERG