We are skeptical about carbon offsets and we are more skeptical about announcements around carbon-neutral fuel and chemical cargoes. The ESG and climate activists have their radars finely tuned for “greenwashing” and other exaggerated claims, and when we get into offsets, whether as a traded market or as a one-off green cargo we rightly see the skeptics. The cargoes – ethylene below and an LNG cargo earlier this week - are PR stunts in our view and while the accounting may be accurate, the one-off costs are likely high, and the ability to repeat the process for significant volumes is limited. It may be proof that you can create carbon neutrality through offsets, but the supply of offsets will likely never be large enough to create affordable permanent pathways, and offsets should be looked at by all as a way to go the last mile, having exhausted all other options, including carbon avoidance and carbon use or sequestration. We have noted in prior work that we see a risk of too many people banking on a share of the offset market than the likely size of the market – creating price inflation and ultimately lower revenues than could have been achieved through alternate means. Current offset markets are cheap – at least relative to other costs of carbon abatement, but higher levels of oversight, which are both needed and planned, will likely limit availability going forward – also suggesting higher pricing.
Source: Bloomberg, C-MACC Analysis, July 2021
Sticking with carbon pricing, there are lots of warning signals going in off in Europe in recent weeks about plans to expand the cap and trade system to other industries, such as shipping and buildings. The risk that all are focused on is the possibility that the EU gets the caps wrong, relative to the ease of initial abatement in each sector. If caps are too high relative to how much can be avoided quickly the credit price in Europe could collapse, removing the current increasing trend (see above) and higher numbers that support and encourage increased investment. If they get it wrong the other way, carbon value could spike, raising compliance costs for those needing to buy credits. This would hurt earnings but it would also stimulate more investment to balance the market. As a region committed to climate change initiatives, the EU would likely be better served erring to the lower cap side.
