In an era where environmental responsibility takes centre stage, a pressing question arises: are businesses truly aligning their actions with their carbon neutrality and net-zero goals, or are some merely using ‘greenwashing’ tactics for profit and a polished public image? Companies find themselves under increasing pressure from both customers and investors to ensure that their operations, services, and products meet carbon-neutral standards. While many organisations genuinely excel in their Environmental, Social, and Governance (ESG) efforts, it is unfortunately all too common for larger corporations to resort to a questionable practice —carbon offsetting.
If you’ve ever come across a company promoting a product as ‘carbon neutral,’ chances are it achieved this status by purchasing carbon credits in a surprisingly unregulated financial market. For instance, if Company A manufactures lamps and emits one tonne of carbon dioxide during production, they can buy a one-tonne carbon credit to compensate for these emissions and legally label their lamps as ‘carbon neutral.’ But who sells these carbon credits, and why do companies invest substantial sums in them?
Two nonprofit organisations, Verra and Gold Standard, effectively dominate the carbon credit market. While these entities don’t directly remove carbon emissions, they subcontract other companies to carry out this crucial work. Verra and Gold Standard also rigorously audit projects related to carbon sequestration, forestry, and agriculture. Therefore, for a business to earn Verified Carbon Units, they must provide proof to Verra or Gold Standard that they have either removed one tonne of carbon dioxide from the atmosphere or prevented its release. However, these organisations maintain stringent application and verification processes.
If a company can successfully have its carbon offsetting activities validated by Verra or Gold Standard, they can then sell specific carbon units (e.g. lamps) to businesses like Company A at a significant markup. Company A is often willing to pay this premium as it allows them to market their products as ‘carbon neutral.’ While this might appear promising in terms of reducing carbon emissions, the reality is often quite different.
This situation raises two critical questions: why are companies willing to pay a premium for these carbon unit products, and why does this carbon offsetting strategy frequently fall short of truly offsetting CO2 emissions?
To address the first question, companies often use the purchase of carbon credits to showcase their ESG credentials. The demand for companies actively reducing their carbon footprint and promoting environmental sustainability has grown since the rise of Environmental, Social, and Governance (ESG) investing starting around 2008. It’s now sought after by the public and shareholders as a mainstream characteristic. This approach increases a company’s chances of being listed on an ESG fund, thereby attracting more potential investors and capital for the company and its senior managers. One of the most effective ways to gain acceptance in these ESG funds is by selling carbon-neutral products. However, it’s become increasingly clear that a company’s ESG status is not necessarily reflective of its overall performance.
According to a recent study published in the Journal of Finance, the University of Chicago analysed sustainability ratings across more than 20,000 mutual funds and their corresponding companies. The study found that high sustainability funds did not consistently outperform low sustainability funds. Investment firms like Vanguard and BlackRock, which had substantial stakes in ESG and mutual funds on behalf of their clients, have started to scale back their ESG initiatives and investments. This shift is primarily due to the realisation that carbon offsetting strategies, which were employed to sell carbon-neutral products, have proven to be ineffective.
A study led by Cambridge University revealed that in 40 Verra-approved rainforest projects, approximately 94% of the sold carbon credits did not result in actual carbon removal from the atmosphere. Yet, these credits allowed companies to label their high-emission products as ‘carbon neutral.’ This raises the question of how these practices persisted. Although Verra and Gold Standard are nonprofit organisations, they rely on fees paid by project leaders and companies during the verification process to generate income and sustain their operations. This financial model incentivises these organisations to sell as many carbon credits as possible.
One might reasonably assume that carbon offsetting primarily involves large industrial machines actively removing carbon dioxide from the atmosphere. However, a significant portion of offsetting efforts is channelled into rainforest projects. This allows companies seeking carbon credits to exploit a clever loophole. These projects would purchase parcels of rainforest land for preservation, and any trees left standing were accepted by Verra as carbon that had been ‘prevented’ from entering the atmosphere, making them eligible for carbon credits. The issue with this approach is that the projects would acquire land where the trees were never intended to be cut down, often because of their remote or inaccessible location. Consequently, the land was relatively inexpensive to purchase. Essentially, this strategy allowed projects to claim trees as carbon credits that were never going to be released into the atmosphere.
Since this report by Cambridge University came out, the ex-CEO of Verra, David Antonioli, has resigned for ‘unrelated reasons’. Regulators have started to shift their focus on the cracking down on carbon neutral marketing, including ‘net-zero’ claims. As well as a steep decline in the value of carbon credits. One carbon credit that was worth around $19 in January 2022, is now worth only $1.77 as of September 2023, a fall of over 90% in a year and a half. Trading firms that had recently bought up a vast amount of carbon credits, with the intention to hold as a long-term investment, have had to write these off as completely worthless. In an interview with Bloomberg, the head of Carbon Trading at Trafigura Group, which is, as of now, the largest carbon credit trader in the world, stated that the complete loss of value seen in some corners of the voluntary carbon market is unlike anything she’s witnessed in oil markets. Companies have become no longer interested in buying them. Carbon offsetting can be a genuinely excellent strategy to help mitigate CO2 emissions, but if they are not going to be done correctly, they are nothing more than a distraction, used to milk investors and customers into falling for unsustainable, ineffective, and superficial carbon neutrality schemes.