Who will buy Kerry’s carbon credits?

By Jean Chemnick | 02/02/2023 07:06 AM EST

The U.S. is designing a carbon offsets program that is expected to feature expensive credits to fund renewable energy. Cue the doubters.

U.S. climate envoy John Kerry.

U.S. climate envoy John Kerry speaking at the COP 27 climate conference in Sharm el-Sheikh, Egypt. Peter Dejong/AP Photo

Climate envoy John Kerry made a bet last year that companies would pony up billions of dollars for carbon credits that carry the State Department’s watermark.

His gamble might not pay off.

Kerry described his idea as a game-changing carbon offsets market that would help corporations meet their climate goals while funding the replacement of dirty electricity in developing nations with clean power — perhaps the world’s most intractable climate challenge.


But his claims about the program, called the Energy Transition Accelerator (ETA), depend on companies being willing to buy carbon credits that could cost far more than what’s currently available on the market for $2 or $3 a ton. Businesses can use carbon credits to claim they’re meeting reduction targets despite continuing to emit — whether they come from Kerry’s program or not.

“If a company can make the same [climate] claim with bad credits as they can with good credits, there’s not a huge incentive for them to go out and buy higher-quality credits,” said Luke Pritchard, nature-based solutions manager at the We Mean Business Coalition.

It’s unclear how much credits will cost under Kerry’s program, but Michael Wara, director of Stanford University’s climate and energy program, suggested that an ideal price for carbon, under any program, would hover around $50 a ton. That’s more than 10 times what the global weighted average price was in 2021.

“I think offsets can be done well at relatively high prices,” he said. “And the challenge is always that the entities buying the offsets don’t want to pay the prices that are required to do offsets well.”

The ETA is still being designed, but Kerry has said it will only support additional renewable energy and the retirement of coal-fired power in developing countries. It also takes a jurisdictional approach, meaning it will support national or regional plans to green power grids overall, not individual projects whose climate benefits could be undercut by fossil fuel development in the same area.

‘Dirt cheap’

Kerry targeted power systems in developing countries because they have the potential to make or break the world’s climate goals in the next decade. But it’s also an area with unique challenges for carbon crediting.

The point of carbon credits is to incentivize activities that result in lower emissions — which wouldn’t have happened without funding provided by the credits.

That is “fiendishly, fiendishly, fiendishly hard” to identify for renewable energy and coal retirements, said Zeke Hausfather, a climate scientist with Stripe, the financial infrastructure platform.

“Solar is dirt cheap,” he said. “There’s a lot of incentives to build solar, and a lot of the reasons people are not building solar and are using coal is not economic, it’s political.”

That’s why the certifiers of carbon credits are bailing out of the renewable sector.

Verra, the world’s largest carbon crediting registry, told E&E News that it had stopped certifying renewable energy production in 2019 with a handful of exceptions and had never certified coal plant retirements.

Kerry’s program — which is expected to formally launch at the U.N. climate talks in November — is making its debut just as the voluntary carbon markets are in the midst of a kind of identity crisis. Old methods of crediting projects have come under intense scrutiny for loading the markets with projects of poor quality.

Now there is an evolution in thinking about how credits should be used.

At conferences from Sharm el-Sheikh to Abu Dhabi, Kerry has suggested that companies might stock up on these credits as a means of achieving their voluntary net-zero targets in the short term — though he’s also insisted that the program won’t become a cheap alternative to cutting their own emissions (Climatewire, Jan. 23).

The Science-based Target Initiative’s Net-Zero Standard, which has become the benchmark for quality corporate climate commitments, doesn’t allow companies to buy credits that avoid emissions outside their value chain to compensate for their own continued emissions.

“Certainly under the current rules with SBTI, you couldn’t use ETA credits for meeting your targets,” said Pritchard of the We Mean Business Coalition.

All that begs the question, will there be enough corporate interest in these credits to deliver on Kerry’s promises?

The State Department hasn’t said how much buy-in they’re expecting for the ETA, but Kerry sold it at the climate summit at Sharm el-Sheikh as a way to compensate for the limitations of government climate finance.

The Bezos Earth Fund and the Rockefeller Foundation, which are joining Kerry’s team in standing up the program, touted an analysis by Climate Advisers that suggested it could mobilize more than $100 billion through 2030.

It’s based on the optimistic assumption that “many companies participate and that these companies are given significant latitude to receive credit for emission reductions financed via the ETA.” The report also included a more modest scenario in which less corporate participation might mobilize between $4 billion to $8 billion through 2030.

Niamh McCarthy, director of climate-related risk at Climate Advisers and one of the report’s authors, told E&E News that the program might appeal to companies in “hard to abate sectors, companies with interim carbon neutrality targets, companies with voluntary net-zero commitments, and companies in compliance markets.”

That description stands to include a vast number of companies in the U.S. and abroad. As an example, more than a third of all publicly traded corporations globally, or 703 companies, have adopted net-zero targets.

The program proposed by Kerry might lure some of those companies to participate through its association with the State Department. That could give investors confidence that the credits wouldn’t be useless if the federal government ultimately moves to regulate voluntary carbon markets.

But that assumes that companies can make use of their offsets in the first place — if not to comply with regulations, at least as a means of demonstrating progress toward their voluntary climate goals.

That’s far from certain.

‘Very narrow and uncertain path’

While Kerry has talked up the credits as a way for companies to meet net-zero targets, policy experts who are designing the ETA expect participating companies to adhere to the STBI standard — which shuns the use of offsets to make up for continued emissions. The program’s architects have even questioned whether the ETA will be an “offsetting program” at all.

John Morton, who until last month was the top climate official at the Treasury Department, told E&E News that firms should get some form of credit in exchange for their investments. He expected it to attract buyers who are willing to pay a higher price because “it has the imprimatur” of the U.S. government.

“I think with all the missteps and kind of false starts, particularly recently, in the voluntary carbon market space, an effort like this that is beginning to have the participation of a broader set of market participants offers a greater sense of security and certainty for potential buyers,” he said.

Asked where they saw demand for ETA credits coming from, BEF and RF told E&ENews: “Companies are looking to invest in climate action — to meet Net Zero goals and be in line with the increased focus on [environment, social and governance]. They want to avoid being accused of greenwashing by investing in activities that don’t result in genuine climate results. An ETA that delivers on quality and that includes robust safeguards could attract a premium price.”

Voluntary carbon markets in general have had a wave of bad press recently after numerous studies and articles have been published scrutinizing their environmental performance.

Carbon crediting certification bodies have been playing defense after a spate of news stories reported they’ve routinely certified credits for projects with negligible climate value. Corporate investors have found themselves skewered in the press for buying “junk” credits to achieve their climate targets.

This legacy could stunt the sector’s future. Companies buy carbon credits to generate goodwill for their brand, and that could stop if they prove to be a reputational liability.

Some leading investors in climate action, like Stripe, are abandoning traditional carbon markets in favor of contracting with firms to support direct air capture of carbon.

Rachel Kyte, a former World Bank official who is now dean of Tuft University’s Fletcher School, said demand softened last year as businesses and their financial advisers eyed changes to the voluntary carbon markets and the rise of “anti-woke investing” sentiment emanating from Republican lawmakers.

“They’re picking their way along this very narrow and uncertain path,” Kyte said of would-be investors.