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Quality is key to unlock the potential of carbon credits
Understanding the value of carbon credits
From 2020 to 2021, the voluntary market quadrupled in value, with some forecasts predicting1 the market would reach “between $10 billion and $40 billion by 20302.” But 2023 saw a slowing in growth3, in part due to criticism projects were not delivering the results they promise. For some, there is unease around the perception that carbon credits allowed companies to continue with business as usual.
“We cannot afford to miss out on all the benefits of carbon credits because of some bad projects. There have been growing pains, but we believe carbon credits are a crucial part of the journey to net zero, and we aren’t running away from them,” says Osborne. “In fact, we believe we must do them better and must work together to deliver that: engaging with the project developers and standards bodies, working to improve measurement and verification processes, doing proper due diligence on the projects you buy credits from.”
One way to do this is by making the voluntary market more transparent and verifiable. “We recognise that there is a trust gap when it comes to the voluntary carbon market and businesses using credits. We hear these concerns and are acting to address them.”
Driving quality carbon credits
Technology is another strength that Shell is looking to leverage, especially to help improve its project monitoring and reporting. Examples include hyperspectral imaging, carbon flux towers, and laboratory assessments. In this space, Ji stresses, “technology is the key to success.”
Carbon markets as part of the solution
Standards frameworks continue to evolve and Shell looks to be part of those conversations, bringing to the table a long history of risk management across established and evolving risk management frameworks.
“It’s our business to manage complex risks across a variety of business activities and geographies,” says Ji. “The specifics of risk management in the carbon offsets space are different, but the concept is similar to what Shell has done for decades. Mature markets have multiple layers of risk management. New markets need to build those layers.”
Shell takes a portfolio approach to its carbon credit strategy. In addition to its quality assurance processes, Shell engages across a range of project types, geographies, developers, and standards’ frameworks.
Diversification is key to preventing risk from over-exposure in any one area. Shell invests in, or buys from, projects spanning more than 30 countries, ranging from waste management to forest conservation, reforestation to grassland restoration.
Shell works with partners who have well-established relationships with the people and communities on the ground that are key to a project’s success and longevity. “A robust and verifiable net carbon reduction or removal is fundamental, but not sufficient by itself,” Ji elaborates. “Enabling co-benefits for the communities involved and reducing the risks of environmental and social externalities alongside carbon credits are a crucial part of the nature-based solutions’ value proposition and a key goal of our business.”
Developing a robust approach
Understanding the value of carbon credits
When it comes to the decarbonisation of the global energy system, Shell believes there is no single solution. Shell considers carbon credits an invaluable decarbonisation lever, at least until cleaner energy solutions can replace the current energy system and the technology has been developed to cost-effectively capture carbon at scale.
“There is a risk that carbon markets are dismissed in the hope of finding a decarbonisation silver bullet, when in fact they can support strategies to avoid and reduce emissions. Solving the wider challenge means increasing the pace and scale at which cleaner energy solutions are deployed while embracing carbon markets and making them as robust, transparent, and additive as possible. To reach net zero, we must use all the measures available to us today.”
“It is for exactly that reason that we think it is so important to make sure that the steps we are taking really do add value in the long run, not just for one news cycle or reporting period. We firmly believe that traded carbon markets — including nature-based carbon offsets — are a critical part of our strategy. Yes, they must be robust. Yes, they must be credible. But we aren’t running away from carbon markets; we are doing carbon markets better, and we hope others will join us.”
Disclaimer: The Reuters news staff had no role in the production of this content. It was created by Reuters Plus, the brand marketing studio of Reuters. To work with Reuters Plus, contact us here.
On its journey to becoming a net-zero emissions energy business by 2050, Shell works to apply the mitigation hierarchy framework of Avoid, Reduce, and then Compensate. The primary aim is to avoid emissions. If this is not possible, a reduction in emissions is the next focus. And where emissions are unavoidable at present, then compensation is used such as via carbon credits.
Carbon markets serve both compliance schemes and voluntary initiatives. Compliance markets are designed to support legally binding emissions reduction targets set by local, regional, national, and international agreements. Voluntary carbon markets (VCMs) exist alongside compliance markets and enable the purchase of carbon credits on a voluntary basis.
While regulated compliance carbon markets can be effective, their establishment and implementation often encounter challenges due to political and economic factors. Here, VCMs can play a vital role in supporting decarbonisation in sectors which are not adequately covered by compliance schemes.
According to Ecosystem Marketplace’s ‘State of the Voluntary Carbon Markets’ report, in 2021 the VCM grew in value by some $2 billion and estimates suggest that the value of the market will increase five-fold or more by 2030.
“Decarbonising the current energy system while transitioning to a new lower carbon one is challenging, but it’s possible provided we deploy all the tools we have on the table. And, without question, that includes carbon markets,” says Osborne. With almost two decades of energy trading and strategy experience, there’s an irony that trading carbon is the very first time that Nick has had to ‘sell’ the benefits of his product.
Compliance markets ‘cap’ the emissions of certain sectors or areas, with the cap reducing over time. Businesses can buy or sell carbon allowances to allow them to meet their cap. This incentivises emissions reductions by making it increasingly expensive to emit and financially beneficial to emit under the cap as they can sell excess allowances.
Osborne is very clear that carbon credits are not something which Shell or any other emitter should use in lieu of avoiding or reducing emissions. “Carbon credits and emissions reductions are complementary, not mutually exclusive.”
“Emissions reductions must happen quickly, and that is more feasible for some industries and activities than it is for others. Compensating for emissions that cannot yet be avoided as part of the solution.”
Where operational changes are not enough to reach a net zero trajectory right now, carbon credits can help compensate for emissions now, as part of a long-term decarbonisation strategy.
Disclaimer: The Reuters news staff had no role in the production of this content. It was created by Reuters Plus, the brand marketing studio of Reuters. To work with Reuters Plus, contact us here.
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Why the world needs nature-based solutions
Interview with Flora Ji
LEGAL DISCLAIMER
Flora Ji, Global Vice President, Nature Based Solutions at Shell, stresses that investments in nature-based solutions (NBS) cannot displace efforts to avoid and reduce greenhouse gas (GHG) emissions, and “provide an important, additional enabler of emissions reduction and drive critically important resources towards the conservation and restoration of at-risk ecosystems.”
Potential emissions reduction pathways are as varied as the sectors that need to follow them. Decarbonisation across these pathways will happen at different speeds. As the Ecosystem Marketplace report indicates, companies are more likely to engage in other decarbonisation investments when they invest in carbon credits as well.
Carbon credits should not reduce or replace investments in the energy transition; they are complementary. “They help bridge where society is now and where we need to be,” notes Ji. “The world needs and deserves all solutions.”
Ji readily acknowledges that credit integrity is an existential issue for voluntary carbon markets. “Without quality and integrity, there is no trust,” she says. “Without trust there is no investment. And without investment there is no impact.”
Shell believes in the critical contribution of carbon credits towards net-zero emissions and recognises this cannot be secured without confidence that they deliver real benefits. That’s why the company is focused on improving and demonstrating the quality of carbon credits to ensure their benefits and contribution can be secured.
In its November 2021 report, called ‘Ensuring high-quality nature-based credits’, Shell laid out the sectoral challenges and shared learnings, and provided an overview of the steps it takes to check that its standards are met, in addition to verification work by third-party certification standards.
“Our approach is about setting a minimum quality threshold that includes robustness of the carbon quantifications as well as strong safeguards to protect local communities and ecosystems,” Ji says.
Additional checks to ensure carbon credit quality include working closely with local partners, due diligence prior to a project or programme approval, and a focus on the gaps or risks that require further scrutiny and mitigation.
“For the credits we purchase and retire from market through our trading team, we carefully source and screen projects and work with multiple certification standards and rating agencies to check that our quality requirements are met.”
One Shell project that highlights both the challenges and opportunities of issuing nature-based carbon credits is Project Tarsier, a forest restoration project that will cover up to 10,000 hectares of degraded land in the islands of Leyte and Biliran and Samar in the Eastern Visayas of the Philippines.
Since the 1960s, these islands have experienced significant forest loss due to legal and illegal logging, agricultural conversion, and poaching of timber (as well as wildlife).
The project is developed jointly by the University of Sunshine Coast and Visayas State University and Shell, in collaboration with the Department of Environment and Natural Resources (DENR), local government, and local People’s Organizations (POs).
The project partners are working together towards protecting and enhancing the project area’s rich biodiversity and the project’s impact will be verified against an international carbon standard like Verified Carbon Standard and the Climate, Community and Biodiversity Standard.
“Credible local partners and robust third-party verification – that’s really the starting point,” Ji explains, “but risk mitigation requires long-lasting commitment. Shell builds relationships with communities around projects. We're in this for the long-haul.”
Carbon mitigation projects affect people on the ground. The Philippines project works closely with more than a dozen POs who hold Community-based Forest Management (CBFM) land tenure to restore and maintain the forests. In addition to restoring the forest with native and endemic tree species and enhancing biodiversity, it is working to bring forest- and non-forest-based livelihood benefits to POs and wider communities over the project’s life.
Making a difference on the ground
Members of the PO community are expected to be employed through the entire value chain of the project, including from developing tree nursery and quality seedlings, planting and then monitoring and maintenance of the trees. The project is anticipated to help scale operations and provide simple guidance for farmers to follow, including safe practices.
“By definition, nature is wild but that doesn’t mean we can’t build greater confidence. These projects aren’t hypothetical and, on the ground, the variables affecting our projects are dynamic,” says Ji. “Effective management of these factors contributes to the sustainability and positive impact of our projects.”
Support is provided for all aspects of seedling management, from building nurseries through to planting, post-planting silviculture and effective plantation monitoring including for fire. A lot of time is taken to engage the POs on the project; including to get their informed consent and agreement to become part of the project and then to train them for the planting maintenance of the trees and to improve their broader capacities in areas such as governance.
“Voluntary carbon markets are far from perfect – I don’t think anyone thinks they are. Their flaws must be highlighted and discussed – that’s how markets evolve and improve,” says Ji. “But, without question, they are also an important enabler of emissions reduction and drive critically important resources towards the conservation and restoration of at-risk ecosystems.”
“Shell is committed to building a quality portfolio, because, managed well, nature-based carbon projects can play a vital role in supporting the energy transition.”
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Why the world needs nature-based solutions
Interview with Flora Ji
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Why the world needs nature-based solutions
Interview with Flora Ji
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Nick talks more about this critical net zero tool
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Delivering decarbonisation
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Delivering decarbonisation
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Interview with Nick Osborne