Junk offsets feeding wave of greenwashing: Study 

Junk offsets feeding wave of greenwashing: Study 
Research looking at 18 carbon offset projects finds only 6% of potential credits linked to additional carbon reductions.
AUG 25, 2023
By  Bloomberg

Corporations relying on carbon credits to support their green claims now face “robust and credible” proof that the vast majority of such securities aren’t fit for that purpose, according to a study published in the journal Science.

The research, which analyzed 18 carbon-offset projects across Peru, Colombia, Cambodia, Tanzania and the Democratic Republic of Congo, found that only 5.4 million — or 6% — of a potential 89 million credits were linked to additional carbon reductions through preserved forests. More than 60 million carbon credits originated from projects that barely reduced deforestation.

“There has been a suspicion that these carbon credits lead to greenwashing,” Andreas Kontoleon, the study’s senior author and a professor of environmental economics and public policy at the University of Cambridge, said in an interview. “We now have robust and credible evidence that offset programs have deficiencies.”

A carbon credit is a paper security that’s supposed to represent one ton of CO2 reduced or removed from the atmosphere, generated by projects like wind farms or planting trees. Buyers can trade the units or use them to offset their own emissions, in which case they must retire the credit to avoid it being used twice. 

The study’s findings underscore the risk of stranded assets in carbon offsetting. They also raise questions about the carbon-neutral claims of companies that rely on such credits.

The forest-protection projects, known as REDD+, generate carbon credits that represent the carbon that will no longer be released through deforestation. All told, voluntary REDD+ projects in 2021 issued 150 million credits valued at $1.3 billion, according to the study in Science. An earlier draft of the study was available online in January.

Energy companies Eni SpA and TotalEnergies, airline British Airways and Nespresso, a unit of Nestle, are among buyers of credits from the worst-performing projects, according to data published by Verra, a standard setter.

Eni bought well over 5 million credits — equivalent to the annual electricity use of about 900,000 homes — from REDD+ projects named in the research. A spokesperson for Eni said it strongly rejects the study’s findings and that its carbon credits are subject to the highest standards of control. 

British Airways said it’s working on a range of climate initiatives and prioritizing reducing its emissions to net zero by 2050, including by investing in sustainable aviation fuel. Nestle Nespresso said it’s moved away from investing in carbon offsets and intends to reach net zero by reducing its greenhouse gas emissions and through carbon removals within its value chain. TotalEnergies didn’t respond to a request for comment.

Trafigura Group, the world’s largest trader of carbon-removal credits, recently suspended a consignment of REDD+ credits as it awaits the results of a probe into the forestry project behind the units. Millions of carbon credits are also lying dormant on the accounts of Vitol, while units of SMS Holding wrote off about 1.5 million credits last year. 

The 18 sites studied had issued 62 million carbon credits as of November 2021, of which 14.6 million have already been used by individuals or organizations to offset their greenhouse gas emissions. The upshot is that “these projects have already been used to offset almost three times more carbon than they have actually mitigated through forest preservation,” Kontoleon said. “And that’s with over 47 million credits still available in the market.”

The project offsets detailed in Science were certified by Verra. The standard setter said it has “significant concerns” about the study’s methodology because of the small sample size.

Extrapolating the study’s conclusions to all carbon offset projects is unwarranted when only about one out of four projects have been examined, Verra said.

“We recognize the areas for improvement in the current system and are committed to fostering that ongoing evolution,” Verra added in a statement on its website.

Terms of the offset purchase contract will determine whether a company that buys junk credits gets any compensation from the offset provider, according to Kontoleon. He said adjustments can be made when offset agreements are evaluated, which is typically every five years.

There are several reasons why offset programs fail to deliver the benefits they claim to provide, according to the study. Projects often rely on historical trends that can be inaccurate, or they are located in areas where the conservation rate is already high.

Current certification rules require fixed periods for projections, so it can be hard to adapt to changes in deforestation rates. And techniques for predicting deforestation may be “opportunistically inflated” to maximize revenues from credit sales, the researchers said.

“The industry needs to improve its protocols and its transparency,” said Kontoleon. “It needs reform.”

Should ESG investors add carbon to their portfolios?

Latest News

Time to get on the China ETF train? Advisors speak up
Time to get on the China ETF train? Advisors speak up

Chinese stocks have been flying for the past month. Should US wealth managers go along for the ride?

Fidelity reports data breach exposing 77,000 customers' personal data
Fidelity reports data breach exposing 77,000 customers' personal data

The investment giant said Social Security numbers, driver's licenses, and other sensitive information was compromised by a third party using newly established accounts.

Another ex-Edelman advisor joins Baird in Virginia
Another ex-Edelman advisor joins Baird in Virginia

The employee-owned hybrid firm's latest hire in Fairfax reportedly managed $285M at his previous firm.

Milton adds to climate-change worries for retirees
Milton adds to climate-change worries for retirees

The hurricane is the latest severe-weather event in a retirement destination, underscoring the concerns about climate change that clients bring up, financial planners say.

$26B RIA EP Wealth strikes private market alliance with Opto Investments
$26B RIA EP Wealth strikes private market alliance with Opto Investments

The tech-driven alts platform will provide support to advisors seeking customized portfolio access for their high-net-worth clients.

SPONSORED Destiny Wealth Partners: RIA Team of the Year shares keys to success

Discover the award-winning strategies behind Destiny Wealth Partners' client-centric approach.

SPONSORED Explore four opportunities to elevate advisor-client relationships

Morningstar’s Joe Agostinelli highlights strategies for advisors to deepen client engagement and drive success