There are some serious players behind the CME offset futures trade highlighted in the linked headline. However, the press release does not provide enough information around how the offset is calculated and this will be critical if the futures product is to develop into a fully functional and fungible market. The agriculture-based offsets sound good and, in many cases, they can be robust in terms of the genuine contribution to lowering CO2 in the atmosphere – for example, where a new tree is planted and there would not have been a new tree without the direct action. But there remains a great deal of debate around whether an initiative is more positive than its alternative. Would a tree have grown naturally if the project was not there? Is the carbon footprint of any wetlands mitigation initiative taken into account when looking at the CO2 offset – same with tree planting? How do you risk adjust the CO2 value of a tree or other agriculture offset – what if the forest burns?
While this CME contract focuses on agricultural-based offsets, true physical abatement – use of alternative power sources or carbon capture, for example, offers greater accountability and therefore greater certainty. We could argue that physical carbon offsets should trade at a higher value than agricultural offsets as a consequence. The challenge here is that the agricultural offset may not cost less (on a full coast basis) than a physical offset. Lower cost agricultural offsets may be being subsidized by someone’s charity – i.e. not accounting for land costs or not fully capturing the planting and maintaining costs. Click here for more on Carbon Offsets
Source: Bloomberg, C-MACC Analysis, August 2021