On the Role of Voluntary Carbon Markets in the Energy Transition for Oil & Gas sector

23 November 2020
White paper for the pre-read of World Energy Council Assembly 2020

Background
Keeping the global temperature increase well below 2 Degrees as compared to the pre-industrial levels has officially become humanity's global priority. In 2015, global leaders agreed to sign the Paris Agreement and capped 98% of the annual human-caused emissions under one treaty. Not only are policy makers on board but investors are making it clear that they consider the climate related risks in their investment strategies, consumers are demanding a sustainable choices for products and services, employees are opting for sustainable employers and whole industries are shifting their business models in a response to the global climate urgency. It is safe to claim that the global race towards the Paris Agreement goals is now fully in the motion.

We know what the target is as well as why we need to achieve it. The question is rather on the how. How do we transform our businesses and our life-styles without jeopardising the functioning of our society or global growth? The pressure is intensified by the limited time left and economical and technological barriers. The Oil & Gas sector provides crucial inputs into many aspects of our lives including materials, health, transportation, energy or industrial production. This is also why an immediate transition is impossible and any transformation will require a whole range of solutions, policy changes and collaborative alliances between public and private actors.

What is the relevance of carbon offsetting on the energy transition?
Carbon offsetting is an action of balancing out an organization's emissions by investing in projects that reduce emissions elsewhere. It is the final step towards carbon neutrality when the actual emission reductions ‘at home’ are impossible to achieve, or simply too costly. Henceforth the role of voluntary carbon market is to: Accelerate emission reductions: Voluntary carbon markets incentivise the investment into the cheapest emission reductions, send the right signal to the market, and hence have the potential to accelerate the reductions and increase the ambition.

Source: Ecosystem Marketplace report 2020 State of the Voluntary Carbon Markets

Ensure financing: USD +93 trillion worth of investment will be needed globally over the next decades to finance the transition to the low carbon economy, according to the IFC, part of which can be sourced as a result of voluntary climate action across the private sector. The chart below shows that over 5.5 billion USD so far flew into the emission reduction projects worldwide as a result of voluntary carbon market activities.

Source: Ecosystem Marketplace report 2020 State of the Voluntary Carbon Markets

Voluntary carbon offsets should serve as a transitional measure and should not exclude genuine emission reduction efforts in the organization’s own boundaries where financially and technologically possible. Although there is no silver bullet for the energy transition, the voluntary carbon market can play a significant role in the global race towards decarbonisation. Should the rulebook for Article 6 of the Paris Agreement be correctly set up, the voluntary carbon market is expected to multiply in terms of volume and price, and serve as one of the enablers of emission reductions globally.

Some of the related opportunities for Oil & Gas sector
There are multiple opportunities for Oil & Gas players related to the carbon market and each player can choose to benefit from one or more of them, depending on the operational, geographical or business model related aspects:

• Financing of upstream emission reductions via carbon markets – Different states have various policies in place for decarbonisation. The European Union, considered as one of the leaders and pioneers, has set the so-called Fuel Quality Directive (FQD) in place. The directive requires the EU's downstream players to reduce the carbon intensity of the sold fuels and enables compliance through a certain amount of Upstream Emission Reduction units (UERs) from sites that are not connected to the distributors' operations. This is an opportunity for upstream producers from outside of the EU, who run emission reduction projects within their upstream activities. The certified UERs can be sold to the EU distributors and this can contribute to the flow of financing to the emission reduction projects within the industry.
• Reducing compliance costs through Carbon Capture and Storage in refineries – The EU ETS Directive enables industrial players to lower their compliance obligation where they can prove to capture and store the carbon emissions coming from their operations. This is an opportunity, for example, for EU-based refineries in case the geographical location enables carbon storage.
• Climate leadership by carbon neutral products – Carbon neutral gas or fuels are starting to gain traction among corporate and individual consumers and any O&G actor can decide to diversify its product portfolio by offering carbon neutral products to climate conscious buyers. Implementation of such an initiative is fairly straightforward: product emissions are calculated and verified by a third party and offsets are retired for every unit of fuel or gas sold. The actor demonstrates climate leadership and enables its customers to opt for climate friendly products.
• Use carbon offsets on your own Net Zero transition (cost efficient way to offset hard to abate or expensive emission reductions) – Decarbonisation of the Scope 1 emissions in O&G sector is a lengthy process. The industry players are using a number of tools to reduce methane emissions, increase energy efficiency and switching to renewables wherever possible. However, achieving 100% efficiency doesn’t happen overnight and there is a certain amount of unavoidable emissions. O&G actors can choose to use verified carbon credits to offset their yearly residual emissions while meanwhile working on their reduction initiatives. In this context, investments in natural climate solutions and nature-based projects are becoming more and more popular across the industry.

How to ensure high environmental Integrity
When it comes to designing the carbon offsetting strategy of O&G actors (either as part of their Net-Zero strategy or to offer carbon neutral energy products), it is important to have program integrity as one of the key criteria. Carbon offsetting is a very sensitive topic and even more so for the O&G sector. There are many sources that focus on the selection of high quality carbon credits as the single most important criteria of making the strategy solid (and Vertis agrees that choosing quality credits is vital) but in our experience there are many additional aspects that need to be considered, such as materiality and significance (what % of your total emissions are you offsetting), mitigation efforts (what emission reduction activities you have in place) and claim appropriateness (what claims do you make as part of your offsetting activity). In terms of the selection of the credits, there are a number of emerging trends as companies search for opportunities to differentiate their carbon offsetting initiatives and improve their environmental impact of offsetting. As an example, It Is worth mentioning blue carbon credits, carbon removals or soil carbon, all of which can bring various additional value and innovative aspects to a company' offset portfolios.

About Vertis
Vertis was founded by James Atkins and Paul Bodnar (later advisor to President Obama on climate change and environment in the White House) with the vision to bring environmental action to the heavy industry and hard-to-abate sectors in the EU. Over 20 years Vertis has steadily grown to become one of the leading carbon trading and advisory houses. To date, Vertis has traded over 1.3 billion allowances and carbon credits via exchanges and OTC, serves to over 1300 heavy industrial and aviation clients from EU and worldwide and has a financial investment provider license complying with MIFID2 rules. Vertis expert services include the trading of a wide range of environmental commodities (renewable energy attributes, carbon offsets, carbon allowances, biogas certificates, upstream emission reductions, energy efficiency certificates, etc.) and strategic advisory in all topics carbon and climate-related (climate and Net-Zero strategies, carbon foot printing, carbon price hedging, emission reduction project development, carbon offsetting or green PPA procurements).

Authors: Katerina Kolaciova (Carbon & EAC Trader | Sustainability Adviser at Vertis Enviornmental Finance Ltd) and Paz Nachon (Head of Climate Action at Vertis Environmental Finance Ltd.)

Vertis are Associate Sponsors for WECA X this year, taking place 30 November – 2 December 2020. Find out more about the virtual World Energy Capital Assembly here