The Green Plains Institute analysis below draws heavily on the EPA emissions data by facility, but correctly, in our view, identifies where CCS makes the most sense in the US. We still struggle with the pipeline distances associated with some of these ideas as CO2 disposal is still a cost for emitters and in any attempt to reduce costs, pipeline distances will be key. We have discussed the opportunity recently for massive blue hydrogen investment (including CCS) to replace industrial heating fuel and this would apply in all of the regions below. Note our conclusions in today’s ESG and Climate report that we expect renewable power installation goals to fall short – requiring more use of natural gas (for power generation or hydrogen production) with accompanying CCS.
Despite the “soaring” carbon offset market in the FT article linked here, we would remind clients that this is something we have written about extensively and that while “nature-based” offset prices have jumped over the last year they remain very low compared to the physical cost of carbon abatement, whether through reforestation or physical abatement for CO2 emitting fuels and processes. The nature-based credits should at least rise to the physical cost of planting trees and maintaining forests (adjusting for the risk of fires etc). This is well above $50 per ton in our view and maybe as high as $100 per ton depending on how you define the costs. The very low price today, despite the recent rise, reflects an oversupply of credits perhaps, but it may also reflect buyers' unwillingness to pay more because of the uncertainties around accuracy and chain of custody of the credits. If the credit truly reflects the removal of 1 ton of CO2, at $14 per credit, someone is subsidizing the credit – maybe those planting the trees. The chart below shows carbon values at the end of December. See our ESG and Climate report No 57 for more.
The carbon credit schematic below helps understand the mechanics, but the diagram does not sufficiently emphasize the critical importance of the “Verification and Validation” step. This is a great example of a mechanism that should work logically, but if the input is wrong the output will be also. Potential buyers and sellers of carbon credits understand the process well, but they are more concerned about what goes in the front end as the value of the credit will be very dependent on the quality. Today the only “sure thing” carbon offset is direct air capture, as all of the agriculture-based offsets need much tighter definitions. See research - Carbon Prices – Inequitable and Uncertain – Not What We Need
ExxonMobil is seriously upping its lower-carbon game with the CCS announcements over the last few weeks and the release this week that states the company will spend $15 billion over the next 6 years on lower carbon initiatives. In this linked headline ExxonMobil states that it will meet its 2025 emission goals this year – we are assuming that this must be correct as the company would not want to risk the accusation of greenwashing. Either way, the critics will weigh in, either claiming “greenwashing” or suggesting that the targets were not high enough, to begin with. The ExxonMobil focus is very much on CCS, which makes sense for an oil and gas-centric company whose only real play right now is to lower the carbon footprint of its fuel portfolio. In the release linked above, ExxonMobil also talks about biofuel and hydrogen initiatives, but again calls for supportive policies from governments and we suspect that the underlying push here is towards the US government. ExxonMobil and others have indicated that $100 per ton is the right incentive to drive CCS and other carbon abatement strategies and we would agree with this estimate as it backs up much of the work that we have done over the last year. See - Carbon: Trading, Offsets, and CCS as a Service – It’s All Coming! and - Carbon Games – Appetite, But Not Enough Hunger Yet. The other reason why ExxonMobil and others would like to see the US act is because other jurisdictions in which they operate will likely take a lead from the US.
The most notable news from the Iceland CO2 direct air capture (DAC) project, illustrated in the Exhibit below, is not that it is working and how energy efficient it is, but that the CO2 capture costs are extremely high and yet all of the offsets are sold. One report talks about the costs per credit approximating $1000 per ton of CO2, which is likely accurate given that the facility is relatively small scale, at 4 thousand metric tons per year. The same report also states that the credits are almost sold out for the 12 years that they are being offered. We believe that this is indicative of the marginal demand for uncontestable carbon offsets, and this is a topic we have covered at length in our ESG and climate work. Shell, bp, and others are selling what they claim to be carbon neutral hydrocarbons around the world and are buying offsets to do so, but they are coming under quite a lot of “greenwashing” fire because of the less tangible/auditable nature of the credits they are buying – often related to agricultural or specific tree conservation/planting initiatives that are questioned because of the validity of the capture claim or the vulnerability of the credit to weather, fires, and forest maintenance years in the future.
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?
There has been a lot of press over the last couple of months around carbon offsets – not least because of Mark Carney’s efforts to legitimize the idea. Mr. Carney’s focus is to create a robust trading platform for the buying and selling of legitimate offsets so that a carbon market can operate efficiently. He believes that without accurate and realistic carbon values, and the ability to buy and sell them, the capital markets around emission reduction will be inefficient and that less money will be attracted into the area. On this, he is probably correct, but in our view, the carbon offset markets have a long way to go.
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.
There have been some disappointing headlines out of the UN climate meeting this week, which is intended to pave the way for some of the COP26 discussions and come up with proposals that are likely to be agreed upon at the meeting. Most of the issues are around who is paying for what and whether developed nations are investing enough to help developing nations, using the guidelines put forward when the Paris Agreement was signed. In the US, the climate agenda and the Biden plan are bogged down in Congress and the plan is unlikely to pass in its current form.