The offsets whack-a-mole

People need more solar panels and wind turbines. Companies need to do something to curb their emissions. The tricky part is that big companies have been using demand for renewable technologies to make themselves look greener — without actually helping create more clean energy.

This process has been made possible by carbon offsets. For the past three years , my colleagues Natasha White , Demetrios Pogkas and I have analyzed tens of thousands of transactions to reveal the companies buying the largest quantities of carbon offsets. The list includes major airlines, oil companies and automakers. But the offsets market is in the throes of a multi-year decline, as we found in our latest analysis, and former big buyers such as Delta Airlines, EasyJet and Google are quitting entirely.

By now you likely know how it’s supposed to work. Companies pay a small sum for a credit representing a ton of carbon dioxide, and in return can negate a ton of emissions from their own carbon accounts. The practice is often criticized, especially when it comes to some of the cheapest and least effective offsets tied to renewable-energy projects. Transactions for renewable offsets assume that the money from corporate polluters helps build a solar or wind farm, thereby displacing the need for a fossil-fuel power plant. Except renewables have long been the cheaper choice, which essentially makes these offsets worthless for the climate.

“For many years, scientific reports have repeatedly questioned the credibility of offsets from renewable-energy projects,” said Lambert Schneider, a carbon markets expert at the German research organization ?ko-Institut. That scrutiny culminated in a decision this summer from a standard-setting organization to classify these types offsets as useless.

The overall market for offsets is in retreat, and in particular fewer big companies are willing to continue purchasing of renewable-energy offsets. And that shows up very clearly in the most recent data, covering thousands of transactions completed in 2023.

But this is not the end of the road.

At the upcoming global climate summit known as COP29, countries are set to sign off on a new United Nations-backed market for trading carbon offsets. This market would include both countries and companies looking to meet climate goals, and it’s something that’s been anticipated since the breakthrough signing of the Paris Agreement in 2015. People who follow the long-running negotiations over this market refer to Article 6, in reference to the part of the agreement text.

But a breakthrough moment at COP29 could offer a new lease on life for low-quality offsets tied to renewable energy, just as corporate buyers had started turning away. There’s an enormous glut of older offsets — 490 million tons, more than half the total — that are linked to renewable-energy projects. These junk offsets will likely end up available to trade on the UN-backed market.

The UN’s stamp of approval could give these offsets more credibility. Some hedge funds are betting that will increase their value.

The vast majority of carbon-offset purchases are voluntary. That means there’s little risk or punishment if companies end up buying junk credit. In turn, there’s little pressure for sellers of offsets to up their game.

“Unless there are legal consequences for parties that continue to issue and transact in low-quality credits, this whack-a-mole problem will likely persist,” said Danny Cullenward, a closer observer of the market at the Kleinman Center for Energy Policy at the University of Pennsylvania.

The full story with names of companies and graphics can be found on Bloomberg.com . For unlimited access to climate and energy news, please subscribe .