Carbon reduction, not distraction

Google “carbon offset” and in the last few weeks alone, you’ll find a new scheme from Qatar Airways, a transnational deal between Peru and Switzerland, and the LSE aiming to become the world’s first carbon neutral university.

What are these offsets and why do we need to pay attention?

 

Carbon offsets are created when emitters of greenhouse gases pay others to absorb or avoid emissions. They first emerged as part of the Kyoto climate protocol back in 2005 and formed a new channel for predominantly inter-governmental aid to limit deforestation or fund the adoption of clean technologies (like cookstoves or wind turbines).

 

After an initial flurry, poor controls saw the scheme flounder by the mid-20-teens, with remaining interest switching to more direct, smaller-scale projects that have become known as Voluntary Carbon Offsets (VCOs). We are now at another pivot point, with huge interest – and money – once again seeking to “pay to pollute”.

 

This renewed focus is fuelled by both regulatory and social pressures. The steady proliferation of Net Zero targets means there’s nowhere to hide: emissions have to fall across the whole economy – and that includes the land sector. For companies, they need to start delivering reduction targets and often have customers increasingly attracted to low carbon footprints. If you, me, a company, a country can’t cut our own emissions directly, an alternative is to fund faster reduction (or even better) outright absorption elsewhere.

Big picture, we can’t allow short-term offsets to distract from the need to reduce emissions at source. We need to electrify transport; we need to find new ways to make steel; we need to change our diet.

On one level, this is a good thing. The land sector – agriculture and forestry – has huge potential to absorb carbon or prevent further release, yet it has little spare cash and is highly fragmented.

 

Carbon offsetting (or that hideously technocratic term, Nature-Based Solutions) gets a cost of carbon into the food chain. It enables realistic economics: do I cut down this forest to grow soy; do I preserve this peat bog from sheep or that mangrove from draining; or do I buy my cattle a new feed that limits their methane burps? Not only are most of these options far cheaper than producing green cement or growing biofuels, but they can also reallocate value, support rural communities and speed the transition.

 

There are big buts, however, in both the macro and the micro. On the latter, verification is still really hard and some projects can have unintended consequences. Big picture, we can’t allow short-term offsets to distract from the need to reduce emissions at source. We need to electrify transport; we need to find new ways to make steel; we need to change our diet.

 

Climate success (limiting warming to less than 1.5oC), needs rapid emissions reduction, with nature just picking up those bits we really can’t eliminate or, ultimately, helping to actually reverse the atmosphere’s manmade carbon overload.

 

How should we think about this as investors? Most importantly, don’t let offsets be used to distract from the main game of emissions reduction – and be very careful about sourcing and verification. On the flip side, there are going to be opportunities to allocate capital in a more carbon-aware land and food system: we need to open our minds and get hunting.

Caroline Cook

Senior analyst

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