Carbon offset markets have long been wrought with difficulties
in verification, both short-term and long-term, and allegations of fraud. The
first big carbon offset market, the UN’s Clean Development Mechanism (CDM) has
been strongly and rightly criticized for generating many credits where there were
no or little verifiable emissions reductions. After the CDM failures, California
developed their ‘standardized approach’ which shifted the focus from individual
projects to project type-specific offset protocols to lower the risk of
over-crediting. A 2020 study of California’s carbon offset system concluded that
it offers the ability to reduce but not eliminate over-crediting. Uncertainty in
true emissions reductions was the major reason given for the inadequacies of
California’s system. The paper concluded that oversight of the program was
insufficient. They acknowledged that while the system does incentivize emitters
to reduce emissions, those emissions are often not accurately quantified.
Another thing the paper noted is that mine methane capture, currently a major carbon
offset target, suffers from these inadequacies.[1]
I will discuss more about mine methane capture protocols and how they compare
to oil and gas methane capture protocols later in this post.
So-called
Scope 3 emissions, those typically from combustion, are the most amenable to
being offset in markets since they cannot be directly eliminated by companies that
produce, process, and burn hydrocarbons. Due to past abuses in carbon offset
markets the need for rigorous third-party verification is very important. There
are two types of carbon credit offsets in the U.S.: regulatory and voluntary.
The first is subject to carbon market rules and the second typically adds voluntarily
to a company’s ESG portfolio. The two carbon markets in the U.S., the California
Air Resources Board (CARB) in California and the Regional Greenhouse Gas Initiative
(RGGI), which includes several states in the Northeast, have protocols about
which types of projects qualify. These are likely to change according to
available data about sequestration rates of different actions. Again, this
uncertainty about sequestration rates of things like soil sequestration (land-based
sequestration), management of wetlands and mangrove swamps (blue carbon
projects), can distort true values.[2]
The simple fact is that sequestration rates are difficult to quantify, both
short-term and long-term.
The voluntary
carbon offsets market is estimated at $2 billion globally and growing. It was
reported at $300 million in 2019 so has grown by over 6 times in 3 years. Much
of this is due to the growth of the ESG movement in the business community. Big
oil companies like BP and Shell, mining giants like BHP, and aviation companies
have been big buyers of carbon offsets. A new article in The Guardian claims
that their own research in conjunction with other investigative journalists has
revealed that more than 90% of rainforest carbon offsets are really just “phantom
credits,” and do not represent real emissions reductions. Their investigation centers
around the company Verra, depicted as the world’s leading carbon standard. Verra
developed the Verified Carbon Standard (VCS) that is used worldwide. Verra
strongly disputes their analysis and methodology. They approve three-quarters
of all voluntary offsets. Its rainforest protection programme makes up 40% of
the credits it approves. The Guardian claims that of the 94.9 million rainforest
carbon credits claimed by Verra, only 5.5 million represent true emissions
reductions. They assert that few areas showed any reduction in deforestation,
as claimed. The journalists used interviews with people on the ground and utilized
a study published in July 2022 by scientists from Cambridge University who used
satellite data and remote sensing to predict reductions in deforestation. Verra’s
rainforest projects began before the Paris agreement in December 2015.[3]
Reading through the Cambridge study I did not see any conclusions matching the
level of “phantom credits” depicted by the journalists. I found that a bit
puzzling. The abstract of the paper is reproduced below and suggests that there
was at least marginal success in reducing deforestation and forest degradation:
“Reducing emissions from deforestation and forest
degradation (REDD+) projects aim to contribute to climate change mitigation by
protecting and enhancing carbon stocks in tropical forests, but there have been
no systematic global evaluations of their impact. We used a new data set for
tropical humid forests and a standardized evaluation approach (based on pixel
matching) to quantify the performance of a representative sample of 40
voluntary REDD+ projects in 9 countries certified under the Verified Carbon
Standard (VCS). In the first 5 years of implementation, deforestation within
project areas was reduced by 47% (95% confidence interval [CI]: 24–68) compared
with matched counterfactual pixels, and degradation rates were 58% lower (95%
CI: 49–63). Reductions were small in absolute terms but greater in sites
located in high-deforestation settings and did not appear to be substantially
undermined by leakage activities in forested areas within 10 km of project
boundaries. At the 26th Conference of the Parties of the United Nations
Framework Convention on Climate Change, the international community renewed its
commitment to tackling tropical deforestation as a nature-based solution to
climate change. Our results indicate that incentivizing forest conservation
through voluntary site-based projects can slow tropical deforestation and
highlight the particular importance of prioritizing financing for areas at
greater risk of deforestation.”[4]
The abstract
certainly suggests that there were some significant successes. However, as the
journalists point out, many of the successes were in just a few of the sites
and other sites likely showed significantly inflated deforestation reductions. The
Guardian article notes that “Verra strongly disputed the studies’
conclusions about its rainforest projects and said the methods the scientists
used cannot capture the true impact on the ground, which explains the
difference between the credits it approves and the emission reductions estimated
by scientists.” They claim that the journalists’ claims are just “extrapolations
of three reports by two different groups, who assessed a small number of
projects using their own methodologies,” and that they are planning to
publish their own assessments soon. Verra also notes that their projects are
regularly assessed by third-party auditors. One auditor did note that these
analyses suggested that predicted deforestation reductions cannot be trusted. Cambridge
ecologist David Coomes, who evaluated Verra projects and was also part of the
Cambridge study noted: “It’s safe to say there are strong discrepancies between
what we’re calculating and what exists in their databases, and that is a matter
for concern and further investigation. I think in the longer term, what we want
is a consensus set of methods which are applied across all sites.” I think
it is pretty clear that the climate benefits in rainforest carbon offset
markets are less than depicted, although it sounds like the Guardian’s claim
that more than 90% of claimed credits are phantom credits is bunk. Clearly, these
rainforest projects, which represent a large percentage of carbon offset
markets, need to be reassessed for accuracy.[5]
The
development in the US over the last few years of responsibly sources gas (RSG) is
a kind of voluntary carbon market where methane emissions of oil and gas upstream
and midstream companies have employed third party audits as well as periodic
and continuous monitoring for methane emissions. Once each company is certified
they call sell their natural gas at a premium to buyers looking to source low
emissions gas. With continuous monitoring and third-party auditing there is
likely to be very good verification of emissions going forward. It is estimated
that about 30% of US natural gas is currently certified and this is likely to
keep growing. As oil and midstream companies join, a big chunk of the whole gas
and oil value chain is likely to be subject to verifiable decarbonization. It
will become the standard rather than the exception. It is not only methane
emissions abatement but E-fracs, E-drilling, power efficiency improvements,
better production per well section, and better water management, which are
involved in these new certifications, of which there are several levels. In the
US the financing for certifying gas has been entirely or mostly voluntary and
paid for by companies since very few are subject to regulatory carbon markets.
That could change in the future so being ahead of the curve is smart. In Canada
which is subject to carbon market rules there is financing available, and the
financers share in the carbon credits. More recently, through the development of quantified emissions tokens (QETs) and certified environmental tokens (CETs), the certified gas attributes can be decoupled, then held, banked, or traded. Thus, it is likely to become an emissions trading system as new buyers show more interest as is occurring. For CETs, 1CET=1MMBTU of certified gas. These tokens and trading systems are still being worked out but are very likely to be more commonplace in the near future. Utilities have shown much interest. The system is still voluntary rather than regulatory, but may well be utilized by producers of hydrogen, methanol, and ammonia as well that derive their products from natural gas. Upfront investments for quantifying and monitoring emissions come down through time and maintenance costs will be on the order of a few cents per MCF so very affordable for producers and Midstream operators to enter. Thus, I think that maot natural gas will be certified (at the varying levels of certification) in the near future. X
Mine methane abatement
is another important means of carbon offsetting. This mostly consists of paying
to flare sections of mines that vent methane to the atmosphere since burning it
produces far less global warming potential than venting. Different mines
contain different levels of methane. When those mines are dewatered for either
mining or coalbed methane production the gas is released. Dewatering a coal bed
can also cause methane to be released from the ground before mining as has happened
in some areas. Some oil and gas reservoirs, notably marine carbonates that
produce sour gas, also produce high levels of CO2. These days, few of such
reservoirs are developed but they have been developed in the past. Some have
been abated with carbon capture and sequestration. One example is Equinor’s Sleipnir
Field in the North Sea, which is the longest running CCS project in the world.
Exxon also has a project in Wyoming. It takes up a big part of past CCS
subsidies. Going forward I do not think such CO2-rich fields would be allowed
to be developed. The same is probably true of so-called “gassy” mines, those
with a high methane content. Mines have yet to be subjected to new methane
emissions rules. One reason might be, as the Climate Policy paper referenced
suggested, is that carbon offsetting has been proposed as a way to deal with
the problem so that perhaps has prevented regulations from being enacted. Oil
and gas methane abatement is wholly market based with no regulatory offset
market and no government subsidization. Essentially, the oil and gas industry finance
their own methane abatement with buyers paying a premium price to help fund it but
the coal companies with gassy mines have other companies do their methane
abatement through buying carbon offsets. Oil and gas companies producing high-CO2
gas do CCS with government subsidization for CO2 abatement. It is not easy to
compare these to see which is the best deal and the fairest. Gassy mines are
still venting much methane. Oil wells in particular do the most flaring and
venting of methane. Dry gas natural gas areas have the lowest methane
emissions. Landfills too vent and flare methane. Quantifying all these emissions,
comparing them, and determining which is most fair is not easy.[6]
Difficulty in
verification is the biggest uncertainty in carbon offsetting. In order to improve the process, there needs
to be accountability, transparency, frequent third-party auditing, and long-term
monitoring.[7]
Claims of “greenwashing” with carbon offsetting are nothing new but can still be
valid. However, I do think we need to be cautious when groups like the Guardian
and Greenpeace say carbon offsets are useless. They may be distorted and not representative
of all emissions, but they certainly achieve some emissions results, I would guess
well over 50% and maybe much more, not less than 10% as these more radical
groups suggest.
References:
[1]
Managing uncertainty in carbon offsets: insights from California’s standardized
approach. Barbara Haya, etal. Climate Policy. Vol. 20, Issue 9, 2020. Managing
uncertainty in carbon offsets: insights from California’s standardized
approach: Climate Policy: Vol 20, No 9 (tandfonline.com)
[2]
The untapped potential of blue carbon credit markets. Deirdre Duncan, etal. The
Carbon Economist. September 23, 2021. The
untapped potential of blue carbon credit markets (pemedianetwork.com)
[3]
Revealed: more than 90% of rainforest carbon offsets by biggest provider are
worthless, analysis shows. Arwa Mahdawi. The Guardian. January 21, 2023. Revealed:
more than 90% of rainforest carbon offsets by biggest provider are worthless,
analysis shows | Carbon offsetting | The Guardian
[4]
A global evaluation of the effectiveness of voluntary REDD+ projects at
reducing deforestation and degradation in the moist tropics. Alejandro Guizar-Coutiño, Julia P. G. Jones,
Andrew Balmford, Rachel Carmenta, David A. Coomes. Conservation Biology. https://doi.org/10.1111/cobi.13970
[5] Revealed:
more than 90% of rainforest carbon offsets by biggest provider are worthless,
analysis shows. Arwa Mahdawi. The Guardian. January 21, 2023. Revealed:
more than 90% of rainforest carbon offsets by biggest provider are worthless,
analysis shows | Carbon offsetting | The Guardian
[6]
Natural Gas and Decarbonization: Key Component and Enabler of the Lower Carbon,
Reasonable Cost Energy Systems of the Future: Strategies for the 2020’s and Beyond.
Kent C. Stewart. March 2022. Amazon Publishing.
[7]
The Problem With Carbon Offsetting. Felicity Bradstock. OilPrice.com. October
15, 2022. The
Problem With Carbon Offsetting | OilPrice.com
X- The Registry Revolution for Differentiated Gas: How PureWest Energy is Delivering Auditable Emissions Reductions with Certified Gas. Webinar January 26, 2023. Project Canary
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