Carbon Offset: Why Are Companies Ignoring the Carbon Mitigation Hierarchy?

Published by Fernando on

Ads:
Reading Time: 9 min

Carbon-intense industries are turning to carbon offsets as a method to achieve net zero emissions by 2030. The small and immature industry of carbon credits cannot be seen as a go-to solution for climate change. Carbon-based businesses must go through drastic transformations to enable a sustainable carbon mitigation strategy.

The carbon offset race

Companies, cities, and countries are running to reduce their carbon emissions. Most of them are focusing on carbon offsets as the preferred initiative to achieve net zero carbon emissions by 2030.

However, according to the resource mitigation hierarchy, offsetting should be the least preferred method to achieve a carbon emission target.

In this article, we will investigate why carbon offsetting is so popular among carbon management strategies and discuss more sustainable approaches to achieve net zero ambitions.

Quick definitions

Before we get into the theory behind the carbon mitigation hierarchy, let us get a few definitions straight:

  • Carbon offset: “an action intended to compensate for the emission of carbon dioxide into the atmosphere as a result of industrial or other human activity, especially when quantified and traded as part of a commercial scheme”
  • Net zero: “a target of completely negating the amount of greenhouse gases produced by human activity, to be achieved by reducing emissions and implementing methods of absorbing carbon dioxide from the atmosphere”

What is the carbon mitigation hierarchy?

The carbon mitigation hierarchy is derived from the general mitigation hierarchy theory. The WWF has an interesting discussion paper where they present the history of mitigation hierarchies:

“Mitigation hierarchies have been used for over a century in natural resource management and include prioritized steps that lead to the best outcomes for people and nature. These steps are generally Avoid, Reduce, Restore, Compensate/Offset, however, adapted for the system to which they are applied”

WWF Discussion Paper: Mitigations Hierarchies April 2020

The definitions of each step are:

  • Avoid: measures taken to avoid creating impacts from the outset or set aside key conservation areas;
  • Reduce: measures taken to reduce the intensity and/or extent of impacts that cannot be completely avoided;
  • Restore: measures taken to restore degraded ecosystems or capture some energy/material benefit;
  • Compensate: measures taken to compensate for any significant residual, adverse impacts that cannot be avoided, reduced, and/or restored;
  • Offset: A type of compensation measure

Throughout time the concept of mitigation hierarchies expanded from the preservation of natural resources into waste management, energy management, and carbon management. Below we can see how the prioritized steps can be translated into each type of resource:

Mitigation hierarchies: waste, carbon, biodiversity, energy

According to the theory of mitigation hierarchies, offsetting is the last action to be taken, after all, other initiatives were implemented. There are at least three to four steps that should be prioritized over offsetting resources.

Specifically for carbon management strategies, the following steps should happen before offsetting:

  • Avoid wasted energy or emitting carbon: reduce the amount of energy lost or avoid generating carbon emissions
  • Efficiency conversion: improve the efficiency of energy conversion, either by improving processes or upgrading conversion technologies
  • Renewable energy: increase the presence of renewable energy in the system

In layman terms, the carbon mitigation hierarchy above can also be understood as:

carbon mitigation hierarchies: reduce, improve, ncrease renewables, offset carbon

Why are companies not following the carbon mitigation hierarchy?

Companies can’t simply purchase offsets and then carry on with business as usual while corporate deforestation and pollution are on the rise. Reforestation is a worthwhile action – but companies cannot pursue it while also destroying forests with impunity. For this reason, when it comes to carbon offsets, CDP advocates for an “all of the above” approach. Emissions reductions must be prioritized, but we need to see all of these actions happening in parallel. Reduce emissions, and simultaneously scale up finance for companies to protect ecosystems.”

CDP, How do carbon offsets fit into a net-zero future?

Despite the clear recommendation on how to approach carbon management and on how to prioritize carbon mitigation activities, carbon reduction is not the most popular method among companies that are trying to achieve net-zero. Instead, carbon offsetting is seen as the preferred method to compensate for carbon emissions.

For some industries, such as aviation and oil and gas, quickly reducing carbon emissions would mean reducing the size of their business. The main problem of those industries is that their principal activity is directly correlated to carbon emissions. Oil and gas companies profit from the sales of products with high carbon content, while airlines’ main operational costs are related to their carbon-based fuel.

Carbon offsets offer an easy and cheap alternative, allowing companies to continue to treat carbon emissions as an “externality”, outsourcing their climate change responsibilities to other companies and customers, detaching it from their business operations.

Carbon offsets are the preferred method of high carbon intensity companies because it:

  • Eliminates the need for large business restructuring
  • Avoids high investments in R&D in search of clean alternatives
  • Does not demand the creation of new revenue streams
  • Allows for status-quo

According to S&P Global, the largest purchasers of carbon offsets are from companies in the oil and gas sector, which focus on nature-based solutions, or reforestation activities.

Statista puts Delta Airlines as the largest buyer of carbon offsets in the period of 2017-2019.

Infographic: Trend in Carbon Offset Purchases | Statista

However, all this demand for carbon credits faces an immature market of carbon offsets. Still, in its infancy, the carbon credit market is struggling to improve accounting and verification methodologies to be used as a valid global standard.

Moreover, the sudden high demand for carbon credits is completely disproportional to the current supply:

voluntary carbon offset market is not large enough to accomodate demand from oil and gas companies

Aware of the limitations in volume and quality of carbon offsets, why are companies not following the carbon mitigation hierarchy?

Case 1 – Airlines do not have (enough) time to reduce emissions

Despite continuous improvements in fuel consumption and efficiency, emissions from aviation account for 2.5% of total global emissions and due to the increase in flight activities, this number is expected to grow.

With fuel costs being one of the largest airline expenses, representing 15% to 20% of total airline expenses, one can understand why the development of cleaner fuel technologies – and potentially more expensive fuels – have not been the focus of the aviation industry.

However, fuel alternatives are coming into the market, such as SAF (sustainable aviation fuel). This fuel is derived from algae, jatropha, or waste by-products and could potentially reduce the carbon footprint of aviation fuel by up to 80%.

Unfortunately, the SAF technology is at early days. Reaching a net-zero target by 2050 would require an 84% annual average increase in SAF production through 2030. Not only that, several other technological developments are needed in the aviation industry to prepare airplanes and the infrastructure for the new fuel.

Aware of the time constraints and technology development challenges, the UK aviation industry decided to focus 36% of its efforts (25.8 MtCO2) on carbon offsets as the main method to reach net zero, leaving only 20% of the efforts (14.4 MtCO2) for SAF.

Note: MtCO2 = million tonnes of carbon dioxide

UK aviation industry - net carbon emissions strategy

In the UK aviation net zero plan no mention is made to reducing the number of flights or using other transportation modes for shorter distances. On the contrary, the industry expects to increase flights by 70% over the next three decades.

Case 2 – Oil and gas majors do not want to (drastically) change their business

During the race to net zero, most of the oil and gas majors have announced commitments to reduce their net emissions by 2050: Shell, TotalEnergies, BP, Equinor, Repsol and Eni.

CompanyShellTotalEnergiesBPEquinor
MarketCapUSD 157 bnUSD 127 bnUSD 91 bnUSD 69 bn
Emissions (scope 1+2)98 MtCO2/year41 MtCO2/year56 MtCO2/year14 MtCO2/year
Emissions (scope 3)1,304 MtCO2/year410 MtCO2/year360 MtCO2/year250 MtCO2/year
Net Zero Target 2030Reduce net carbon-intensity by 20% (baseline: 2016)Reduce carbon-intensity by 15%Reduction on operations of 30-35%. Reduciton on oil and gas production of 35-40%Carbon neutral global operations
Net Zero Target 2050Reduce net carbon-intensity by 100% (scope 1+2+3, baseline 2016)- Across worldwide operations (scope 1+2)
- Across all production and energy products in Europe (scope 1+2+3)
- At least 60% reduction in carbon-intensity of all energy products (scope 3)
- Across operations on an absolute basis and on carbon in oil and gas production on an absolute basis (scope 1+2)
- 50% cut in the carbon intensity of products (scope 3)
- Reduce absolute GHG emissions from operated plants in Norway, without offsets (scope 1+2)
- Global net zero with offsets (scope 3)
CCS strategyAdd 25 MtCO2/year of carbon capture and storage (CCS) capacity by 2035Northern Lights, collaboration among Equinor, Total, Shell and the Norwegian government to store up to 1.5 MtCO2/year with initial investment of 6.9 billion NOKLead role in the Net Zero Teesside (NZT) and Northern Endurance Partnership (NEP) projects, to deliver the UK’s first gas-fired power station with CCUSNorthern Lights, collaboration among Equinor, Total, Shell and the Norwegian government.
Offset strategyUse nature-based solutions (NBS) to offset emissions of around 120 MtCO2/year by 2030New Nature Based Solutions business unit with annual budget of $100 million to reach carbon storage capacity of 5 MtCO2/year by 2030Majority stake in Finite Carbon, the largest developer of forest carbon offsets in the USLow carbon technologies and
nature-based solutions as 25% share of total R&D expenditure
OtherWork with the SBTi and Transition Pathway Initiative to develop standards for the industry and align with those standardsTotal Carbon Neutrality Ventures to focus on carbon neutrality and increase investment capacity to $400 million over the next 5 yearsInstall methane measurement at oil and gas processing sites by 2023 and reduce methane intensity of operations by 50%Ensuring no routine flaring and near zero methane emissions intensity by 2030.

For oil and gas companies, about 85% of the emissions are from the products they sell (scope 3). Most of the companies listed above focus on reducing the carbon intensity of those products (relative reduction), instead of the absolute emissions. This allows companies to increase their overall production of carbon products sold, and, consequently, increase future emissions.

Carbon emissions - scope , scope 2 and scope 3

Moreover, all net zero targets of oil and gas companies above rely heavily on natural carbon sinks: carbon capture & storage (CSS) and carbon offsets (natural-based solutions).

For example, to be executed as planned, Shell’s carbon offset ambitions would require the reforestation of 700 million hectares, which represents a forest of the size of Brazil. However, Shell’s net zero plan is not seen as ambitious enough to mitigate climate change. In May 2021, The Dutch court has ruled that:

Royal Dutch Shell is “obliged to reduce the CO2 emissions of the Shell group’s activities by net 45% at end 2030 relative to 2019 through the Shell group’s corporate policy”.

The Dutch Court

Shell needs to accelerate its climate ambitions – from a 20% relative reduction to a 45% absolute reduction in CO2 emissions by 2030 – and focus on solutions that do not rely heavily on carbon compensation strategies. To keep its financial ambitions and comply with the Dutch court ruling, Shell will need to drastically change its business in the coming decade.

However, Shell is not planning to phase out oil and gas products anytime soon. On their sustainability report, oil production is expected to continue during the 21st century, requiring enough CCS projects to capture almost 12 Gt of CO2 per year.

Shell - carbon emissions captured by CCS

How to approach carbon emissions sustainably?

Airlines and oil and gas companies will need to reinvent their businesses in a short timeframe if they want to join businesses and governments working towards stopping and reversing climate change.

A great example of a company that has been through a successful green transformation is Ørsted. In a bit more than a decade, the Danish utility, previously named DONG (Danish Oil and Natural Gas), went from being a traditional oil and gas player to become a truly sustainable company and leader in the green energy transition.

By divesting its oil and gas plants and heavily investing in renewable energy (mainly offshore wind), Ørsted was able to pivot its business and, at the same time, increase revenue and profitability.

Ørsted to become carbon neutral in 2025

Ørsted carbon reduction ambitions:

  • Carbon-neutral by 2025 (scope 1+2): targeting direct emissions from energy generation, operations, and administration (scope 1); and indirect emissions from energy consumption (scope 2)
  • 50% carbon reduction in 2032 (scope 3): targeting indirect emissions from the supply chain, construction contractors, wholesale buying and selling of natural gas, and administration.
  • Carbon-neutral by 2040 (scopes 1-3): targeting all direct and indirect emissions from the business

Ørsted is not only planning to achieve carbon-neutrality ahead of the Paris Agreement ambitions, but it will be executing the plan in line with the Science-Based Targets initiative (SBTi).

Logo Science-based targets initiative (SBTi) and business ambition 1.5C

The SBTi is a partnership between CDP, the United Nations Global Compact, World Resources Institute (WRI), and the World Wide Fund for Nature (WWF), aiming to increase corporate ambition in the fight against climate change.

Enjoying this content? Sign up for YGW Newsletter

Conclusion – A sustainable net zero strategy must follow the carbon mitigation hierarchies

Only by transforming legacy businesses, eliminating carbon-intense operations, and developing new and cleaner revenue streams, companies will be able to plan and execute sustainable net zero strategies.

Carbon offsets can be part of the solution but cannot be seen as the preferred method for reducing carbon emissions. Nature and early-stage technologies cannot be seen as future hope to “eliminate” excessive and growing volumes of GHG emissions.

The reduction of absolute carbon emissions must be the priority across all industries. Those that cannot adapt quickly, must suffer the consequences.


Not an investment advice: The information provided on this website is intended for general information purposes only and does not constitute investment advice, financial advice, trading advice, or any other sort of advice. You should conduct your due diligence and, if necessary, consult a qualified independent financial advisor before making any investment decisions.

Disclaimer: This website may use affiliate links. Keep in mind that we may receive commissions when you click our links and make purchases.

Ads:

Fernando

Fernando created Your Green Wealth to help investors find sustainable investing options. When not writing for Your Green Wealth, he is a business developer for renewable energy projects.

0 Comments

Leave a Reply