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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Investigation Into Carbon Offsets Forces Shell To Rethink Strategy

  • Shell had planned to invest $100 million annually in developing carbon sinks that would generate 120 million carbon credits annually from 2030; the company has now abandoned these plans.
  • A media investigation led by The Guardian and Germany’s Die Zeit found that up to 90% of carbon offsets verified by the largest certification company, Verra, did not guarantee the protection they claimed to offer.
  • The revelations have impacted other major players in the carbon offset market, causing traders to face losses and companies like Nestle to focus on reducing their own emissions instead of buying carbon credits.
Carbon

A year ago, Shell had big plans for its decarbonization. These plans included a sharp cut in oil and gas production and the development of a whole new business segment: carbon offsets.

Now, Shell has not only abandoned its plan to reduce oil and gas production—and investment—without any fanfare, it has also quit its carbon offsets plan.

It was an ambitious plan. Per Bloomberg, Shell was going to invest $100 million annually in developing carbon sinks that would then yield some 120 million carbon credits, or offsets, annually, beginning in 2030. Now, all this has been canceled. And not a moment too soon.

Carbon offsets are an increasingly popular tool in the energy transition. They essentially allow the company that buys them to emit a certain amount of CO2 because it would be offset by the existence of a rainforest, grassland, or another ecosystem that absorbs carbon dioxide.

Many believe that the market for carbon offsets could become as large as the market for any other globally popular product, especially with some governments tightening emission regulations on a pretty much weekly basis to counter the effects of what they see as human-made climate change.

These tighter regulations and the threat of ever-tighter ones certainly create a demand for solutions to the problems emitting companies face, which is higher bills because of their emissions. Carbon offsets were seen as one excellent solution to this problem. Until recent research suggested that most of the carbon offsets that are currently traded are  basically worthless.

The point of a carbon offset is to serve as a guarantee that, say, the rainforest for which it was issued will not be cut down. A company can buy a carbon offset and book a lower carbon footprint, thanks to that. An individual could also buy a carbon offset if they are worried that they had contributed to climate change by taking a flight, for instance. Carbon offsets are pretty flexible that way.

So, Shell joined the crowds betting on carbon offsets, planning to even develop the ecosystems it would then use as the basis for the carbon offsets it would issue—and profit from. Meanwhile, The Guardian teamed up with Germany’s Die Zeit and a nonprofit investigative journalism organization SourceMaterial to look into whether trade in carbon offsets does indeed protect rainforests, grasslands, and all the other ecosystems the offsets are issued for.

What the investigators found was perhaps no surprise to many who had been skeptical of the merits of the carbon offset market from the start. They claimed that the large majority of carbon offsets sold globally were, in essence, worthless.

The investigators looked into carbon offsets certified by the world’s largest provider of such certification services, a company called Verra. Verra manages several environmental standards, and those include carbon offset certification—the guarantee that a carbon offset you might want to buy to offset your flight’s footprint will indeed contribute to the non-deforestation of, for instance, the Congo. Verra, then, promises that this carbon offset is genuine. But what the media investigation discovered was that as much as 90% of Verra-verified offsets did not, in fact, guarantee the non-deforestation and protection of the areas they were issued for.

The investigation was first covered by The Guardian in early 2023. One of the most vocal pro-transition media in the world, the outlet noted at the time that the findings about those carbon offsets were preliminary. Now, the investigation has become public and Shell has quit its carbon offset plans.

Of course, it could be sheer coincidence. It could be a revision on the part of the supermajor of its earlier plans as it learned more about how credit offsets work and how challenging it might be to guarantee they are genuine—which is what Verra was supposed to do. Or it could be no coincidence as the findings of The Guardian’s and Die Zeit’s investigation will likely continue to be amplified across media, wreaking havoc on the carbon offset market.

Carbon offset traders are already facing hefty losses as the price of the offsets tumbles in the wake of the investigation, the Australian Financial Review reported days after the investigation’s results were made public. The report said that “a number of big traders in the offsets market have acknowledged they are having to treat defunct credits as stranded assets.”

Not everyone agrees with the revelations made by the investigators, of course. Eni, for one, a big buyer of the credits certified by Verra, strongly disagrees, saying the carbon offsets it has bought were subject to the highest quality standards.

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But Nestle, another big buyer of these offsets, appears to have changed its mind about them and would now focus on reducing its own emissions instead of offsetting them through the purchase of carbon credits.

It appears these are not the best of times for carbon offsets. Regulators on both sides of the Atlantic are looking into them to make sure they are genuine and not worthless. The market itself has not been growing as fast as Shell—and others—would have liked, per one company executive in charge of Shell’s “nature-based solutions.” And quality has been hard to guarantee—an admission suggesting the carbon offset investigation has got it right.

By Irina Slav for Oilprice.com

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