The environmental trading platform Xpansiv came up last year with a novel approach to cut emissions from oil and gas drilling: digitized versions of fossil fuels.
The Xpansiv Digital Fuels Program provides detailed environmental data about each cubic foot of natural gas and barrel of crude, enabling the more efficient drillers to market their products as “responsibly sourced gas” or “carbon-neutral oil.” Producers of oil and gas with leak rates below a threshold set by S&P Global Inc. can also sell carbon offsets for their so-called avoided methane emissions.
Xpansiv is one of many carbon trading platforms that have sprung up in recent years, backed by venture capitalists hoping to cash in on the proliferation of corporate climate pledges. The privately held company — whose investors include Occidental Petroleum Corp., BP PLC and S&P — argues that markets for digital fuels, emissions offsets and other intangible environmental commodities provide new financial incentives for lower-emission drilling.
“It’s better than the alternative, right?” said Henrik Hasselknippe, who runs Xpansiv’s exchange operations and services. “The alternative is to have our current production.”
There are catches, though, according to analysts, nonprofit groups and even some companies that are in the carbon offset business, in which polluters pay other companies to reduce or remove their planet-warming emissions.
The booming offset industry has little government oversight. Few of the companies that sell offsets can guarantee that the investments will reduce emissions of carbon dioxide, methane or other greenhouse gases. There’s also uncertainty about how to accurately measure the benefits they claim to provide. And in many cases, no one will know if the investments pay off for years — perhaps even decades.
That creates a risk that offsets become a fig leaf that allows companies and policymakers to avoid more aggressive and necessary climate action, according to critics. And the investments could become a money-making scheme for Big Oil executives and Wall Street bankers, rather than a means to invest in substantive climate projects.
“Without the right policy to ensure the quality of the offset, it will eventually become a money-generating tool for investors,” said Yvonne Lam, head of carbon-capture research at the data firm Rystad Energy. “This doesn’t really benefit the right project, especially those that are really trying to make an impact on climate change.”
A case of déjà vu
Carbon trading began in the early 2000s as a way for national governments to comply with their emissions reduction commitments under the Kyoto Protocol, a United Nations-backed climate treaty.
Later that decade, voluntary carbon markets began to form alongside Kyoto’s compliance exchanges. In the United States, much of the interest in voluntary emissions trading came from Wall Street. Bankers were enticed by then-President Barack Obama’s bid to enact a climate bill, which would have capped emissions and allowed corporate polluters to trade emissions offsets.
But in 2010, that cap-and-trade bill died in the Senate, and most investment banks — still hurting from the global financial crisis — lost interest in pursuing the new market.
Fast forward to 2015, when world leaders signed the Paris Agreement, a successor to the Kyoto climate treaty. The Paris accords included a provision, known as Article 6, that laid the groundwork for a global carbon compliance market. During the U.N.’s Glasgow climate conference last year, international officials finally hammered out rules for governments’ carbon trading.
While there are no government-backed rules in place for private transactions to ensure that the trades cut emissions and don’t double-count the benefits of a project, discussions are underway to create guidelines for these voluntary carbon markets (Climatewire, Dec. 9, 2021).
“A lot of what’s going on now feels like déjà vu all over again,” said Derik Broekhoff, a senior scientist at the nonprofit Stockholm Environment Institute who’s been researching carbon markets for years. “There’s at least the potential for it to be different this time, and [to reach] a larger scale.”
The renewal of interest in carbon offsets in recent years has led to a spike in funding for firms in the carbon accounting space, an emerging sector that includes companies like Xpansiv. Between 2019 and the first quarter of this year, venture capital firms and other investors have poured over $510 million into carbon accounting companies, according to data from the financial research firm PitchBook Data Inc.
Investors are chasing the potential for exponential growth in emissions trading. The voluntary market for carbon offsets could increase from $300 million in 2019 to $50 billion by the end of the decade, according to the consulting firm McKinsey & Co. Other market estimates run as high as $180 billion over that time frame.
Voluntary offsets are a key part of the oil industry’s plans to reduce its climate-warming pollution. Big European companies like BP and Shell PLC have said they want to reach “net zero” emissions, but they want to do it while still producing oil and gas for decades. That will only pencil out if they buy offsets that are linked to tree farms and other projects that remove carbon dioxide from the atmosphere.
In the U.S., Occidental announced the sale of its first shipment of “carbon neutral oil” in January. It offset the emissions linked to all 2 million barrels of crude — from extraction to combustion.
Through its subsidiary, Oxy Low Carbon Ventures LLC, Occidental also sells offsets. It is planning to build a plant that can capture carbon dioxide directly from the atmosphere and store it underground, and it has already begun selling credits from the future plant to other companies, including the aircraft maker Airbus SE (Energywire, March 24).
Safeguards for a growing market
Scaling up voluntary carbon markets will likely entail some growing pains. As McKinsey noted in a research paper last year, “a measure of skepticism attends the use of credits in decarbonization.”
The bulk of offsets that are traded on voluntary markets are so-called nature-based credits. Those offsets are produced by companies that plant trees or crops and then calculate the amount of carbon the vegetation sucks from the air. Other credits are based on promises to protect swaths of forests that could otherwise be logged.
Critics of nature-based credits point out that it takes years for trees to mature, so it’s often unclear how much carbon dioxide they’ll take in. And in a warming world, there’s an increasing likelihood they could die in a drought or burn down. The moment that happens, the offset becomes more than worthless: it ceases to absorb carbon, it might actually be emitting carbon (in the case of wildfires), and it has been used to justify a carbon-emitting action that might have otherwise not taken place.
Sylvera, a data company that analyzes carbon-storage projects, has found that while some companies are issuing legitimate credits, others are selling offset credits even though they aren’t storing emissions effectively, said Samuel Gill, the firm’s co-founder.
Those projects “should not issue a single credit,” he said. He spoke last month at CERAWeek, a major energy conference put on by Xpansiv investor S&P.
There is also an emerging market for engineered carbon removal, in which companies create processes that suck carbon from the air and store it underground. Those processes can permanently remove carbon, but the offsets they produce currently cost orders of magnitude more than natural ones (Climatewire, April 15).
Proponents say offset programs have come a long way, and that they provide benefits beyond just sequestering carbon dioxide.
“Carbon credits can help to drive important social and economic progress by making impactful projects economically viable in the long run and creating a steady flow of additional income for communities,” said Mikkel Larsen, chief executive officer of Climate Impact X, an exchange that recently opened in Singapore. “This is what carbon credits are uniquely positioned to deliver.”
Right now, most of the transactions are essentially private deals between buyers and sellers. That means there’s almost no way to tell how much companies paid for the credits, and whether the offset programs that the credits represent are actually effective at reducing emissions, said Ryan Fan, a managing director at CIBC, the Canadian investment bank.
As the market grows, offsets will start to trade more like stocks on an exchange. Individuals could get into the market, looking to offset their personal emissions. And sellers could introduce more complicated investments — derivatives intended to lower the risk of offset trades, or products like exchange-traded funds that are linked to a basket of offset prices.
“It’s going to take a massive amount of education,” Fan said.
CIBC and other banks recently set up Carbonplace, which is intended to be a platform for settling transactions in the offset market. They argue banks could bring some clarity to offset trading, since both the buyers and sellers will have to have bank accounts. The banks are also experienced in dealing with government regulations, which Fan and others see as inevitable for the offset market.
“There have to be safeguards and rails built as the market grows,” he said.
Improved transparency or a smokescreen?
Broekhoff, the Stockholm Environment Institute scientist, would like to see voluntary markets more closely follow the high-quality standards required for the offsets governments trade on compliance markets.
“What I’m hopeful for is a convergence between regulatory and voluntary markets so that it’s not so much a bifurcation or a clear separation between the two — that what separates voluntary from regulatory is the demand rather than the supply,” said Broekhoff, who has been calling for stricter government oversight of voluntary markets for more a decade.
“What we need is an efficient, collective, global response to climate change, with all of these things working together,” he said.
Environmentalists are more doubtful about the role of voluntary markets. In particular, carbon trading skeptics question whether the oil and gas companies helping to shape the voluntary markets are truly interested in limiting global warming.
“If they want to become green companies, they need to invest in renewable energy,” said Gilles Dufrasne, a policy expert at the nonprofit Carbon Market Watch. “The carbon markets and credits are not going to green their business in a sustainable way.”
Dufrasne called the oil and gas industry’s growing involvement in the carbon offset space “hugely problematic.” At BP, that has included purchasing the majority stake in forestry offset developer Finite Carbon and a seat on Xpansiv’s board of directors.
Finite Carbon manages about 3 million acres of forest across North America. BP is one of several companies that buy credits from the company, a spokesperson said in an email.
Finite Carbon is aware of the concerns about the offset market, and uses third-party verification to ensure that its projects reduce emissions, according to the spokesperson.
“We believe that high-quality, verified nature-based carbon offsets are possible and are a necessary tool to slow climate change,” the spokesperson wrote. “Others in the industry who use questionable practices do a disservice to the industry as a whole, and we continue to push for consistent industry standards and innovations to improve accounting practices and the regenerative impacts of nature-based offset projects.”
BP, Occidental and S&P are now funders, users and validators of Xpansiv, meaning they have interests in both the success of the platform, as well as some of the transactions that occur on it.
Xpansiv said these arrangements don’t pose a conflict of interest.
“The way we run our business is based on how we can maximize value for the business and for all of our shareholders and for all of our investors,” said Xpansiv’s Hasselknippe.
BP said it won’t need to use offsets to reach the pollution-cutting goals it has set for this decade. However, the company’s latest sustainability plan doesn’t say whether it’ll use offsets to reach its broader goal of becoming “net zero” by 2050.
Oxy said in a statement that it supports “industry initiatives” to bring clarity to the offset market.
“Oxy believes that improved infrastructure to collect emissions data in energy supply chains would help accelerate transparency around commodity life cycle emissions and global decarbonization and carbon removal efforts,” spokesperson Eric Moses wrote in an email.
S&P spokesperson Ola Fadahunsi said the company “is committed to the independence and objectivity of its products and services and has controls in place to identify and manage actual, potential, or perceived conflicts of interests.”
Many experts acknowledge that voluntary carbon markets could eventually help offset corporate emissions that can’t be easily eliminated. That’s why, for example, Dufrasne and Broekhoff both serve alongside officials from BP and the coal-fired utility Eskom Holdings SOC Ltd. in nonprofit groups working to establish guidelines for the field.
“But in order to play a positive role, [voluntary markets] need to significantly change,” said Dufrasne of Carbon Market Watch. “The way these systems are established today, I don’t think they’re making a significant difference that outweighs the cost that they are generating by providing a smokescreen for companies to hide their inaction.”
This story also appears in Climatewire.
Correction: A previous version of this story contained incorrect names for Climate Impact X and Carbonplace.