Episode 48

Three news items caught my eyes recently.

The first one was oil traders Vitol announced they will offer carbon neutral liquified natural gas, or LNG, to their customers by using voluntary carbon credits to offset the emissions from that liquified natural gas.

The same week, Gazprom said it delivered its first carbon neutral LNG to Shell in the UK, again, using voluntary carbon credits to apparently deliver a carbon neutral fossil fuel.

In other words, Vitol and Gazprom and Shell sold the very same old dirty polluting LNG, which leaked all the way from production to transportation, then is going to be burned to continue to increase emissions, but that’s just fine because they planted a couple of trees.

Another news item that caught my eyes was also about Shell. They announced that they wanted to ramp up their use of nature-based carbon offsets, which include, for example, forestation projects, to 120 million tons a year by 2030, while investing $100 million in this forestation sector.  But Shell also said they want to do that while increasing oil and gas production.

I mean, they are taking ‘greenwashing’ to a whole new level.

They’re announcing with a straight face, both an increase in total fossil fuel output and a promise to go to net zero by paying others to plant trees, again. By the way, Shell are doing that by pretending they’re going to find more carbon offsets than the entire global voluntary carbon offset market in 2019. That market was 104 million tons, and Shell apparently is going to find, on its own, 120 million tons.

The final news item was Delta Airlines. Delta said it was going to spend $30 million to offset 13 million metric tons of carbon emissions last year, as part of its pledge to help combat climate change.

These stories have a common thread.

Four different companies all think that they can continue doing what they do, which as far as climate change is concerned is increasing emissions, while looking great doing it. In other words, these companies think they can buy indulgences, allowing them to continue burning fossil fuels and therefore it’s all just fine.

Well, you know what? It’s not.

We must put a complete stop to that. So I am just going to come out and say it: Voluntary carbon markets should be cancelled.

Voluntary carbon markets, in other words, planting a tree, then getting a piece of paper estimating how many emissions that tree is going to absorb, then selling that piece of paper to a polluter to allow him to continue to pollute because he has bought an indulgence, all in voluntary frameworks that regulators aren’t policing, which are being abused, left, right and center, should be cancelled.

Specifically, companies buying carbon offsets when not required by law, in other words, companies buying voluntary carbon credits, are greenwashing, all of them.

Some know it, some don’t.  It doesn’t matter in any case, they need to stop.

Consumers, citizens, people buying carbon offsets on a voluntary basis, for example, to offset their flights or the pollution from their gas guzzling SUVs are being abused.

In the previous episode of The Angry Clean Energy Guy, I tried to show why the ‘planting trees thing’ was an illusion, a device, something ineffective and quite possibly destructive, most of the time.  Today, I will take you through why in 2021 we should not be having voluntary carbon markets at all. These should not exist. They are CO2 indulgences whose time has passed.

There is more.

As you know, if you want to get elected, requirement number one is to come up with a meaningless tagline, while pretending everything is going pear shaped, something like ‘Take Back Control’ or ‘Make America Great Again’.  Similarly, apparently, if you want to pollute, requirement number one these days is to come up with a meaningless tagline, while everything is actually going pear shaped, something like ‘Net Zero by 2050’ and then you can just keep polluting at will, hiding behind voluntary carbon offsets.

So, no more ‘net zero’, please.   It’s just zero. What is this ‘net’ thing about in any case?

Welcome to Episode 48 of The Angry Clean Energy Guy with me, Assaad Razzouk. I am so happy you’re here. Thank you.

AT THE BEGINNING THERE WAS RIO

Let’s start from the beginning.

The global legal construct, if you will, around climate change was born in 1992.  That’s almost 30 years ago, when the United Nations Framework Convention on Climate Change, yes, I know it’s a mouthful, was negotiated at the United Nations Conference on Environment and Development, another mouthful, but luckily this one more commonly known as the Earth Summit, in Rio de Janeiro.

That was 1992, Rio.

What this meant was that pretty much all the countries in the world agreed then that we humans were interfering with the Earth’s climate, because we, humans, fueled industrialization with oil, gas, and coal, and by burning these, or releasing them from under the crust of the Earth, we pumped enormous amount of climate-warming gases into the atmosphere.

Very straightforward, so far.

The gases, in turn, interfered with our natural climate cycles, threatening more floods, droughts, extreme heat than we can handle.  Plus on top: the Arctic and the Antarctic ice melting, the Himalaya’s collapsing, sea levels rising, etc.

We did not know then when our impact on the climate would be everywhere for everyone to see, or how exactly this would play out.  But already back in 1992, we knew that this would lead in time to cities and countries being submerged, others becoming uninhabitable, and then yet more experiencing food shortages and lots of people on the move to more hospitable lands.

Lots and lots and lots of climate refugees.

So we, the world, had to act and the 1992 Earth Summit was a historic first, because it was the first time we brought into the debate the complex relationship between economic development on the one hand, and environmental sustainability.

In particular, at the time, the world had already agreed that countries had what’s called ‘common but differentiated responsibilities’ in fighting global climate change.  These are code words that mean that rich countries, better equipped to confront the issue, and in any case responsible for most of the problem because as they industrialized, they pumped far more gases into the atmosphere than poorer countries, should take the lead in fighting climate change.

I suppose, because it was Rio, it was a beautiful document at a beautiful moment in time in a beautiful city, and so everybody signed it.

Once they left Rio, however, most, but in particular, the wealthy nations of Europe, North America and Australia promptly ignored it.

That was a preview of decades of climate change talks that followed.

Rich countries, in particular, especially ignored the bit which clearly indicated that there was a difference in responsibility between themselves, rich countries, and poorer countries.  Rich countries were and still are responsible for the overwhelming majority of the pollution sent up into the atmosphere since the industrial revolution two hundred years ago.

President George Bush further gave a sneak preview of the difficulties the world will face in confronting this global problem by declaring that the ‘American way of life’ is not negotiable. I am not exactly sure what he meant, given that clean energy and a cleaner planet actually enhance livelihoods, but I suspect he meant at the time that the Americans wanted to keep ultra large refrigerators fueled with coal plants, gas guzzling cars, energy inefficient buildings and roads, trillions of supermarket plastic bags that they like to throw away – yet somehow decrease their dependence on burning oil and gas, all at the same time.

They wanted to have their cake and eat it too.

The entire effort guided by the United Nations since then became symbolic.

Words were exchanged and agreed every year at wonderful annual climate summits, heavily attended by pretty much all the governments in the world, following which hardly anything at all happened. It was Groundhog Day, every year.

From 1995, climate talks became an annual event where countries regularly were updated on climate science, exhaustively discussed policy responses, negotiated joint efforts, adopted declaration, then promptly forgot about the whole thing.

That was from the 1992 Rio Earth Summit until 2005, when something called the Kyoto Protocol was ratified.

THE KYOTO PROTOCOL

The Kyoto Protocol was in fact the first concrete attempt to move from symbols to action. Why? Because it was the first opportunity presented to the private sector to make money while saving the world at the same time.

Pollution is agnostic and it’s indiscriminate when it comes to its impact on the globe and the human race. It does not matter where that pollution is generated: It all ends up in the same place, which is our planet’s atmosphere.

Because it doesn’t matter where that pollution is generated, the Kyoto Protocol was a courageous effort, at the time, to attack that pollution pretty much globally.  Its focus was to reduce worldwide pollution by creating a way to give people a piece of paper they could sell to others, if they reduced pollution and were able to prove it.  The idea was to accelerate fighting climate change by focusing on where reducing pollution was cheapest and then gradually moved to more challenging countries and sectors. And so the whole Kyoto Protocol principle was to drive pollution reductions through market-based mechanisms and carbon credits. Why? Because this had proven to be a huge success before in the United States, in the 1990s, when the 1990 Clean Air Act included pioneering cap-and- trade plans that created carbon markets which attacked, at the time, Sulphur emissions and cut them down dramatically and within a few years, the entire problem was gone.

Given that precedent from the United States where we learned that market mechanisms worked provided they were regulated and enforced to fight pollution cost effectively, the Kyoto Protocol was designed and launched, and it was a means to introduce the very same proven market mechanisms to slash, this time, not Sulphur emissions, but global greenhouse gas emissions.  The carbon credits were supposed to act as financial incentives.

COMPLIANCE CARBON MARKETS

Today there are many markets for carbon, but for simplicity, you can divide them into two parts.

There are those mandated by laws and regulations and those that are voluntary and not actually mandated, so where nobody’s actually asking anybody to do anything.

The carbon markets mandated by laws are called compliance markets and they’re governed by rules. The biggest and most famous are the European Union Emissions Trading Scheme, which is a regulated carbon market covering the European Union, as well as California’s Greenhouse Gas Scheme and coming incredibly soon, within a couple of months, the Chinese Emissions Trading Scheme, which is going to be the largest in the world.  New Zealand has one as well, as do some US north-eastern states and there are pockets of regulated carbon markets elsewhere.

The way these work is if you’re a business in certain selected sectors and you emit greenhouse gases, you’re required to either decrease your emissions, or alternatively, buy a credit for each ton of carbon dioxide equivalent that you emit annually on top of that threshold. You can buy these credits from government or from businesses who reduce their emissions, because if you, as a business, managed to reduce your emissions through, for example, better energy efficiency or capturing methane or many other techniques, you can actually create and earn those carbon credits and then you can sell them to somebody who’s polluting beyond their cap.

What does then is it commoditizes carbon credits and creates a market between all these polluters.  These markets generally trade only in their own carbon allowances, although some accept carbon offsets that come from a pollution reduction activity in a different country, but only if that pollution reduction activity in a different country complies with strict regulatory rules in that market.

The thing to remember is that these compliance markets are organized, regulated and broadly speaking they work.  The only key to making them work is political will.  There is no other challenge, we know that they work.

These regulated carbon markets took off from 2005, and that’s including the Kyoto Protocol and the market for regulated European carbon. Then California took off and others and the latest kid on the block, this year, is going to be China.

The Kyoto Protocol market subsequently collapsed and pretty much disappeared because of a lack of political will. But the other markets, where political will was existent, are working increasingly well and are delivering world leading results, in particular in the EU and in California.

VOLUNTARY CARBON MARKETS

At the same time as these regulated carbon markets took off, a voluntary market turned up as well. And as I was saying earlier, the voluntary market is basically one where no one is telling anyone what to do and these are the markets that need to be cancelled because they are a huge problem.

These voluntary markets were born by people creating standards to certify that a carbon credit is respectable. At the same time, developers went out and created projects that, for example, sequester carbon or cut it. Think afforestation, so planting trees or sowing seeds in areas without trees before, or turning around degraded forests or reforestation.

Companies started buying these voluntary carbon offsets created by the developers and certified by the private standards in order to meet their carbon reduction goals.

Back in 2005, I was a huge supporter of this voluntary market and financed one of its standards for several years. But my expectation and that of many others who understood the power of market-based mechanisms to solve pollution challenges was that this voluntary market would run until 2020 and not beyond.  Why? Because we knew, 16 years ago in 2005, that come 2020, we won’t have time anymore for solutions which transitioned companies to do something.  We assumed, naively obviously, that 16 years later, the companies would be actually doing something, as opposed to still transitioning to maybe doing something.

Here’s a date check: We are in 2021.

We no longer have any time for playing games with voluntary carbon credits.  Today, these are simply CO2 indulgences, and we cannot afford any, as in zero. Why? Because, also back in 2005, we knew that the concentration of carbon in the atmosphere was increasing at a regular rate each year and that that rate of increase meant that by 2030, we would have locked in irreversible climate change at very dangerous warming levels. Guess what? We’re in 2021 now, only nine years from 2030.

We have to move not to net zero, but to zero.

Actions that do not decrease emissions, directly, are meaningless.

What’s ironic, of course, is that pretty much not much has happened in the voluntary carbon markets for many years – or at least in any massive volumes.  But of course in 2020 voluntary issuance was up 76%. Forestry projects became hugely popular, big companies started buying offsets left, right and center. Think about that for a second. Why are the voluntary carbon markets finally taking off about 15, 16 years too late? I’ll tell you why: Because smart people at companies around the world figured out that is how they’re going to game the system, by doing nothing at all while looking amazing.

“Vitol is selling carbon neutral LNG”. That sounds good, doesn’t it? But in fact, it’s completely meaningless. The carbon offsets attached to their LNG are coming from God knows where, certified by unregulated bodies and then monitored and verified in haphazard manners without consistency over the life that you’ve got to do these things over, which is 30 years or more.

I mean, what are we, reforesting now at historically world record speeds?

The entire voluntary carbon market is an illusion.

Bear with me just for one or two more minutes on that point.

But on a related note, first, offsets accepted by compliance markets are fine. In other words, Vitol is more than welcome to go and buy compliance offsets, i.e. offsets that are regulated by the European Union or by California, in order to market its so-called carbon neutral LNG.  Companies can go out and buy these if they can find them. But of course, most won’t be able to find them and even if they did will not want to pay for them. Why? Because of their price.

Companies like Shell and Vitol and Gazprom are paying $2 or less for these voluntary carbon credits. That’s $2, because they have gamed those voluntary carbon markets.

Last I checked, regulated carbon credits in Europe were $50. That’s 25 times more.

If you run the numbers, what you’ll see is that if oil and gas companies had to buy European compliance offsets for example, many would be technically bankrupt immediately. Why? Because these regulated offsets are starting to communicate the real price of our burning of more oil, gas, and coal and the price signal they’re sending is that we simply cannot afford it.

The question is as follows: How do you get Shell to spend its money decreasing emissions rather than planting trees?  At the moment, they are trying so hard to come out as the good guys, sometimes for spending 0.1% of their revenues on a bunch of trees in the wrong place, planted in the wrong way. And I’m talking Shell generically by the way. This applies to any oil, gas, and coal company or trader that is even uttering the words “carbon neutral” or “net zero”.  It applies to banks. It applies to everybody hiding behind voluntary carbon markets. They are all greenwashing, unless they are buying compliance credits and that should be the general rule.

INDIVIDUALS SHOULD NEVER BUY CARBON OFFSETS

Here’s another question. Many people want to do the right thing.  Citizens for example compute their carbon footprint from living, traveling, eating, driving then they go and try and find carbon offsets that they can buy to offset that carbon footprint. Should they do that?

The answer is they should absolutely not do that.

Here’s a fun fact to explain this.

The very first popular carbon calculator was invented by BP, the oil company. Why? Because, deliberately, what BP wanted was to shift responsibility to you and me, the consumers, which tragically allows them to increase production as we consume more of their stuff.

I mean, how crazy is that?

We should not be encouraging them. Do not offset your carbon footprint.

You shouldn’t be having a carbon footprint to begin with, through corporate and government action. In addition, as far as the consumer is concerned, the voluntary carbon offsets that the consumer is buying are both overpriced (we don’t have the power to source the absolutely cheapest carbon offsets in the world then add these to our LNG cargo) and ineffective (carbon credits that an individual buys are almost always linked to a planting trees project, which is at least 75% ineffective).

For more on that point, I’ll give you two data points. First, you can listen to my previous podcast, Episode 47 of The Angry Clean Energy Guy on the planting trees thing. Second, check out just this headline from a news story, which I’m happy to say came out after my Episode 47 podcast, via Bloomberg: “How Mexico’s Vast Tree-Planting Program Ended Up Encouraging Deforestation: Sowing Life, AMLO’s (Mexico’s) flagship environmental project, may have resulted in the loss of forest cover nearly the size of New York City”. In other words, you can get planting trees so wrong, as to actually encourage deforestation. In the case of Mexico, the deforestation is of an area as big as Mexico City. I don’t think I can say it any better than that.

ADMIRE WHAT HAPPENED

Let’s take a step back and admire what happened.

The world agrees climate change is a huge problem in Rio in 1992. That’s 29 years ago.

Emissions keep rising.

Then global climate talks deliver the Kyoto Protocol as an effective instrument in 2005. That’s 16 years ago.

Emissions keep rising.

Then the world tanks the Kyoto Protocol in 2012. That’s nine years ago.

Emissions keep rising.

The world wakes up again in Paris in 2015 and agrees the Paris Climate Agreement. That’s six years ago.

Emissions keep rising. But this time, companies start feeling the heat. A couple of years after Paris comes out the concept of ‘net zero’, which ranks up there with ‘Take Back Control’ and ‘Make America Great Again’, introduced by very smart people gaming the systems.

And, guess what?

Emissions keep rising.

Even a global pandemic could not move the needle. Surely that’s a testament to how hard companies, in particular, and investors are trying to game the system.  We need to call them out.

CANCEL THE VOLUNTARY CARBON MARKETS

The existence of the voluntary carbon market in 2021 is a testament to our failure.

Cancel the voluntary carbon markets so that companies have no more place to hide and are forced to run faster. Much, much faster.

So let me say it again. The entire voluntary carbon market is a sham, an illusion-promotion device and needs to be cancelled.

Yes, price carbon, absolutely. That is an imperative. But that needs to be done in the context of a regulated cap and trade market with laws, and with rising offset prices that also have a minimum level.  Companies should and can buy carbon offsets but only those carbon offsets accepted in a compliance market regulated by a government. Otherwise it’s just hot air and greenwashing.

To close, here are two examples of what I thought was good corporate practice to contrast and compare with all those companies playing hide and seek on climate.

Federal Express, for example, the packaging giant, said a few days ago that it was aiming to become carbon neutral. To back up its objective, it was going to spend $2 billion towards that goal, fully electrify all its parcel pickup and delivery fleet, invest in less polluting aviation fuels and more efficient planes and give Yale University a hundred million dollars to scientifically explore better natural carbon sinks and what we can do about those.

Obviously, FedEx flies an enormous amount of planes, so clearly they are not going to go carbon neutral anytime soon. However, they’re trying, they’re not hiding behind carbon offsets and at the same time, their fate also depends on innovation in electric aircraft.  We know that’s coming.  They’re putting proper money behind their pledge. My expectation would be that FedEx would be increasingly investing in that carbon neutral goal over the next few years, hopefully without a single time referring to carbon offsets.

Then over in Europe, Morrison’s, the British supermarket chain, said it’s going to source all its products from net zero British farms by 2030, largely by switching to renewable energy, reducing water and fertilizer use and embracing climate smart agriculture. At the same time, it’s going to work with farmers to encourage them to restore grassland, peatland, forest, and hedge rows on their own estate. Now that makes sense. Carbon credits don’t.

Thank you so much for listening to this Episode 48 of The Angry Clean Energy Guy with me, Assaad Razzouk and have a great couple of weeks.