Transparency remains a key concern as companies will be required to disclose their purchases of carbon offsets.
- There is growing momentum to use high-quality offsets to address residual emissions as part of net zero strategies, although this is currently not an option under major target-setting methodologies.
- Regulators in the US and the EU are working on imposing mandatory disclosures on corporate use of offsets, which will be hampered by the current lack of transparency.
- Meanwhile, the price of offsets is rising, adding further challenges for companies looking to buy them.
According to PwC, corporate use of carbon offsets can play an important role in addressing climate change. As such, recourse to high-quality offsets to address residual emissions may be required as an element of a comprehensive net zero strategy.
The Science Based Targets initiative, one of the most prestigious and widely used target-setting bodies, does not allow it. Participating companies can offset 5-10% of their residual emissions only once they reach their net zero targets, though they are encouraged to make additional investments in mitigation activities beyond their value chain to contribute to global climate goals. These investments, however, do not replace a company’s own emission reductions and cannot count towards their net zero target.
Nonetheless, many companies include carbon credits in their climate strategies. The voluntary carbon markets are growing rapidly fuelled by strong demand, but the landscape continues to evolve as issues such as double counting and additionality are yet to be solved. Corporate buyers, meanwhile, are facing a series of challenges in terms of transparency and costs.
Disclosure requirements are coming up
So far, disclosure regimes such as Task Force on Climate-related Financial Disclosures have not required companies to report on the number of credits they retire, nor on their origin or identity. According to Sylvera, this has resulted in patchy, incomplete or totally absent disclosures of carbon credit usage.
To understand their impact and the accuracy of a company’s claim, clear information must be provided about the role of carbon credits, and also the identity and integrity of credits being used. This is being addressed by regulators in some regions, including the US and the EU, which are proposing more comprehensive disclosures about corporate use of credits.
Indeed, the Securities and Exchange Commission (SEC) has proposed the most extensive disclosure requirements on carbon credits – covering any company that files documents with the SEC, plus companies that list securities on exchanges, or have more than $10 million in assets – although it is expected to be watered down after the consultation period.
In the EU, the Corporate Sustainability Reporting Directive will require disclosures from companies with over 250 employees, $40 million in assets or $20 million in revenue, expanding coverage from 11,000 to 50,000 companies.
Since 2017, around 636 million carbon credits have been retired across the registries listed previously and used by companies to compensate for their emissions. Using disclosures from CDP and the registries, Sylvera linked 79% of them to 1,450 companies disclosing climate-related information on CDP since 2017.
Of those 1,450 companies, 88% have emission reduction targets. Nearly half of the 500 million credits used to meet those targets, however, cannot be traced back to their issuing projects due to poor disclosure, according to Sylvera’s analysis. This means that the integrity of carbon credits used towards emission reduction claims cannot be proven, raising questions on the validity of progress made towards the targets.
Challenges with price transparency…
Moreover, companies do not routinely disclose what they pay for carbon offsets due to commercial sensitivity, which makes it difficult for investors and other stakeholders to gauge how these risks might affect individual companies’ net zero transition plans.
A new report by PwC analysed FTSE 350 reporting in 2022, finding that 118 companies (34%) included a reference to carbon offsets. Only 19 companies, however, made reference to the cost of offsets, and just seven referenced potential future price increases, representing just 2% of the whole FTSE 350.
No companies in the FTSE 350 currently report voluntary purchases of carbon capture offsets, or removal projects, and the majority of offsets purchased are avoidance offsets. The vast majority (80%) of total offsets purchased were from avoided deforestation, mixed and renewable energy project types.
…and price
Adding further challenges to companies looking to buy carbon credits, PwC estimated that the cost of corporate carbon offsetting could rise exponentially under a carbon capture scenario by 2050 as businesses race to meet net zero targets.
In 2022, FTSE 350 companies publicly reported purchases of voluntary carbon offsets totalling £38 million. Based on current pricing models, PwC calculated that, by 2030, this same volume of offsets would cost companies more than £135 million. Prices are expected to continue to rise until 2050, when the cost of the same volume of offsets may peak at £365 million.
PwC found that 80% of the volume of offsets reported to have been purchased in 2022 were classed as avoidance offsets, derived from projects such as avoided deforestation. In a scenario where only removal offsets can be purchased, the same volume of voluntary offsets FTSE 350 companies purchased in 2022 for £38 million would cost £438 million by 2030. Prices are expected to peak in 2037, where the purchases would rise to £2.6 billion.
“Companies across all sectors must consider the potential financial impacts of rising offset prices as part of their Net Zero planning. If we get to that stage where the use of offsetting to reach Net Zero targets becomes sufficiently expensive so as to become unviable, and in the absence of other strategies, companies will be unable to meet their Net Zero commitments in the timeframes they have published,” commented Ian Milborrow, sustainability partner at PwC UK. “There are a number of steps that companies can take to address these challenges, including making longer-term offset purchase agreements, developing internal carbon pricing mechanisms and, wherever possible, focusing on decarbonisation to reduce their exposure to future offset price rises.”
“In addition, clear, consistent disclosure of a carbon offset purchasing strategy through annual and sustainability reporting – within the limits of commercial sensitivities – will provide critical transparency and reassurance for investors.”
