For integrated energy companies, in particular, we believe carbon offsets are required to meet their ambitious CO2 reduction goals, offering a tailwind for offset developers.
A carbon offset broadly refers to a specific reduction in emissions (or an increase in storage) to compensate for large CO2 emissions that occur elsewhere in the economy. Offsets are most suitable for reducing hard-to-abate emissions, because tradeable credits reduce global CO2 emissions by motivating offset development projects that incrementally reduce atmospheric CO2. Examples include direct air capture, land-use changes, silviculture and excess credits generated by CCUS.
How do BP, Chevron, Exxon, Shell impact carbon offset markets?
Plans disclosed by the big four oil and gas supermajors alone will drive carbon offset markets, increasing quality and size over the next decade: a tall order. Credit buyers currently penalize credits inconsistent with a preferred vintage, location or type. Some of these criteria make sense: credits sourced 10 years ago likely have some hair on them. Other credits are questionable at the creation point, such as those claimed for not cutting down trees.
Orennia believes the future voluntary carbon market will have a higher degree of standardization and auditability, allowing higher valuations for carbon offset credits from all sources. Offset credit spot and future exchanges that require sellers to physically deliver and use a creditable validation process are the best to minimize offset discrimination, set global prices and provide liquidity, in our opinion. In these types of exchanges, the seller (short leg) of the contract physically delivers validated offsets at expiration, thus eliminating buyers from cherry-picking specific project offsets.
Orennia estimates that offsetting half of scope 1 and 2 emissions for the four biggest integrated oil players (ExxonMobil, Shell, Chevron and BP) by 2030 will require annual offsets of ~130 million tCO2, similar in magnitude to carbon offset credits retired in 2021.
Expressed as a percentage of offset credit inventory, 130 MtCO2 represents 18% of existing outstanding credits, according to our calculations.
What this means
With more companies committing to reductions in scope 3 emissions, we expect the demand for offset credits will soon outpace supply as firms need the credits to meet their ESG targets. Alternatively, there is risk that ever-more-expensive credits will threaten scope 3 emission plans.
Orennia helps clients navigate this increasingly complex market, and as demand increases and outpaces supply, there is no time to waste. Our team is helping clients with their carbon reduction strategies in order to make the most of their energy transition investments.