SEC New Climate Disclosure Rule Turns into a Battleground

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The cost of the Securities and Exchange Commission’s (SEC) proposed rule on climate disclosure is becoming a battlefield for businesses and politicians.

The SEC says that demanding firms to report environmental impact and risks due to climate change will raise the cost to businesses. It will be up from $3.9 billion to $10.2 billion.

The costs are only rough estimations. They’re high because companies need to disclose data that some haven’t measured and reported before.

Proponents of the new SEC rules said that many firms are already reporting the required data. And that standardizing the numbers will help investors save some money.

But critics of the proposed law argued that the associated costs are too burdensome.

SEC Climate Disclosure Rule’s Estimated Cost

Under the SEC’s new rule, businesses have to report their GHG emissions which may include those from suppliers and customers. This is otherwise known as Scope 3 emissions.

Some of the reported climate data will need an independent audit.

Firms will also have to report the impact of climate risks they’re facing on their financial statements. These include things like flooding and drought.

The required reporting will cost a small publicly listed firm about $420,000 a year on average. While it will be $530,000 a year for a bigger firm, according to SEC.

The chart shows the estimated annual cost to a company with SEC’s climate disclosure rule.

Source: U.S. Securities and Exchange Commission

Various stakeholders took different positions during the SEC proposal’s consultation. It will extend until mid-June.

What The Opponents Think

Critics of the new rule say that actual costs could be more expensive for firms that are new to reporting climate data than what SEC estimates.

That’s because it will include a lot of new expense items. These include developing new systems for collecting, analyzing, and reporting data. It may also involve costs to hire new staff, consultants, and auditors.

As per David Lynn, former SEC official and current law firm partner in Morrison & Foerster:

“This climate rule-making is unlike anything I’ve seen in my 25-year career in securities law, in the breadth and scope of the proposals.”

Likewise, the trade and industry groups raised their concern about the costs of the new rule. In particular, the National Mining Association told the SEC that:

“Its incredibly consequential and complicated rule would impose substantial administrative burdens on companies.”

Republicans who go against the SEC’s move to rule over climate disclosure are flagging the cost as a major issue, too. In fact, 19 senators told the agency that its proposal comes with huge costs for employers.

They wrote that the billions in new compliance costs would decrease shareholder returns. They also added that the extra costs could lead to fewer firms becoming publicly traded.

These senators said that many large companies have been disclosing climate data due to investor pressure. The majority of them (4 out 5) had reported their GHG emissions (Scopes 1 and 2) as per Refinitiv’s analysis. So, the SEC should not impose rules on this but rather allow such voluntary reporting to continue.

What The Proponents Say

But large investors think that the present voluntary climate disclosures are a mess. This takes more time and is hard for them to decide which company to invest in.

Other stakeholders also believe that investors need clear and consistent data to aid in their decisions. They’ll be guided if climate change will or will not impact their returns.

Also, researchers who analyzed the effects of the cost of the SEC climate disclosure rule said that saying it will hurt the market may be too much.

According to a finance professor,

“These are meaningful [cost] numbers but our research suggests that the costs are unlikely to have a significant impact on the numbers of firms going public or private.”

Take for instance the case of some investors surveyed. They said they spent about $1.4 million a year on average on climate data reporting. And that the most costly item amounting to $487,000 went to rating firms, consultants, and data providers.

Meanwhile, surveyed firms said that reporting the information required under SEC’s new rule cost them about $533,000 a year. This figure is very close to what the agency estimated to be the cost ($530,000) of the proposed rule for bigger firms.

Linda-Eling Lee from MSCI Inc. said that other countries are requiring businesses for similar climate data that SEC will ask from US companies. She also noted that:

“The more standardization there is, and the more harmonization there is everyone benefits… Both the people who have to do the reporting and the entities that have to use the data.”

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Restrictions from Indonesia and PNG May Cut Forest Carbon Credits

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The carbon credits market faced restrictions when two nations with large rainforests cut back on forest carbon credits.

Indonesia and Papua New Guinea are limiting the credits produced by preserving their rainforests. Last month, both countries released official statements about this matter.

PNG suspended new carbon credit deals after a watchdog group raised red flags on a deal in the Oro province. Its government decided to make a stronger legal framework governing voluntary carbon credits.

PNG’s environment ministry said that the temporary ban is to ensure proper stock take. It’ll also give time to audit the existing carbon projects in the country.

Likewise, the Indonesian government also held carbon project validation due to regulatory concerns. The suspension involved credit issuances associated with projects in North Sumatra and Kalimantan.

Indonesia is home to some of the world’s largest forest-preservation carbon projects. In fact, it has been the biggest supplier of forestry and land management producing carbon credits in Verra.

Verra is one of the two major carbon registries in the sector.

Why Set Forest Carbon Credits Limitations?

Developers of carbon credits buy the rights to endangered rainforests and pay locals to protect them. The locals’ preservation efforts reduce the carbon emitted into the air.

The reduced emissions produce carbon credits. These credits are then sold to overseas businesses to offset their own GHG emissions.

The idea behind this scheme is to incentivize the local people with rights to the forest to earn revenue from preserving it and not destroying it. It’s one way to fight climate change and help reverse its damaging effects.

But both countries decided to place new restrictions on generating forest carbon credits. One factor leading to this decision is the concern of who gets the credit for reducing emissions.

Under the climate accords, nations commit to cutting each of their GHG emissions. But to avoid double counting emission reductions, those who sell credits can’t count them in their own climate targets.

In particular, Indonesia worries about the growing private carbon projects in the country. It may seem that they’re losing control of their rainforest’s ability to store carbon.

Rainforests have become one of Indonesia’s major commodities.

In fact, under the nation’s law, it’s illegal to take something from the forests if it violates the rules. So, all carbon projects are under evaluation by the forestry management to ensure they don’t break Indonesia’s laws.

The government has been tightening regulations and says stricter rules are coming.

Indonesia’s restrictions on forest carbon credits are also mirroring the carbon markets worldwide.

Meanwhile, PNG is also home to the world’s 3rd biggest tropical rainforest. It keeps 7% of the earth’s biodiversity, making it so enticing to carbon financiers.

Moreover, protecting the forests is vital to PNG’s climate goals. But, more than 70% of timber production in the country is illegal.

And so, having some restrictions on PNG’s forest carbon credits generation is important. It’s to ensure that there’s proper oversight of the carbon market from the government.

Carbon Projects Affected by Restrictions

This affects large carbon credit producing projects such as the Indonesian Rimba Raya REDD+ project on the island of Borneo.

Also affected is the Katingan Mentaya Project which is under the PT Rimba Makmur Utama, which claims to be the biggest emission-reduction forest project globally.

The project gives local people jobs to preserve the thick forest as home to many species. The project developer had sold the remaining carbon credits to French and Japanese businesses.

Permian Global, which also develops forest protection projects and finances the Katingan Project said:

“Keeping a close eye on developments across the Indonesian carbon market, not least to ensure the project’s continued compliance with any new legislation.”

Some climate activists are positive about government restrictions on forest carbon credits. They say that private carbon credits projects are not doing enough to reduce deforestation.

They also said that project developers can easily overstate the damage to the forest in the absence of the project. This, in turn, allows them to overestimate the reduction in emissions.

A related case occurred in the U.S. public forest projects claimed to generate dubious carbon credits.

Hence, restrictions on carbon credits generated by forest projects seem to be necessary. They can help strengthen investors’ trust in the market.

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ICE Launches New Nature-Based Solutions Futures Contract, Rivals CME

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Intercontinental Exchange, Inc. or ICE has launched new nature-based solutions carbon credit futures contract.

ICE is a Fortune 500 company that offers financial technology, data, and market infrastructure services. It operates exchanges, like the NYSE, and clearing houses to help people invest, raise capital and manage risk across asset classes.

ICE created its first nature-based futures contract called NBS future. It trades under the contract code NBT, which delivers verified carbon unit (VCU) credits.

ICE NBT futures have several certifications. These include Verra VCS Agriculture, and Forestry and Other Land Use (AFOLU) Projects. It also has certifications from the Climate Community and Biodiversity (CCB) Standard.

ICE Nature-Based Solutions Futures Contract

An entity can produce NBS carbon credits through various schemes like planting trees or protecting forests.

Each ICE NBS futures contract equals 1,000 carbon credits. And each credit equals one metric ton of emissions removed or reduced by projects that preserve natural ecosystems.

It has vintages covering January 1, 2016, to December 31, 2020.

ICE has listed NBS futures expiries in December 2022, December 2023, and December 2024.

They traded at $11.25 per tonne by 1109 GMT, according to data from the ICE website.

As per Gordon Bennett, Managing Director of Utility Markets at ICE,

“The NBS future is our first contract specifically designed to measure the carbon sequestration and storage capabilities of nature… we hope it to be an important valuation tool to conserve and grow the world’s natural capital base.”

The decision to launch this contract will help bring price signals to the carbon market. The firm also believes that it will incentivize efficient capital allocation to balance the world’s carbon budget and hit net zero goals.

ICE has worked with environmental markets for about 20 years now. Over this period, it has traded over 100 billion tons of carbon allowances and over 250 million renewable energy certificates.

Moreover, ICE traded about 3 billion carbon credits, which is equal to over 1.4 billion Renewable Identification Numbers.

In 2021 alone, ICE traded around $1 trillion in the notional value of carbon allowances. This is equal to more than half the estimated global annual energy-related emissions.

ICE Futures Contract Supporters

A lot of large companies are supporting the futures contract. These are Shell, Chevron, Vitol, Trafigura, EDF Trading, Elbow River Marketing Ltd. (a fully owned Parkland Fuel subsidiary), the Macquarie Group, and Vertree Partners.

For instance, according to Bill McGrath from Shell,

“The launch of ICE NBS futures is a crucial milestone to scale the voluntary carbon market… In particular, it will help boost the flow of capital for developing nature-based projects.”

Last year, Shell partnered with PetroChina to supply it with carbon-neutral LNG cargos. Their goal is to offset CO2 emissions generated across the LNG value chain with carbon credits from nature-based projects.

For Vitol, quality assurance and transparency of carbon credits are also vital. Michael Curran from Vitol said that the launch will grow investment in verified carbon mitigating projects. Plus, it will raise standards and price transparency across the carbon credit industry.

Whereas Hannah Hauman from Trafigura finds the launch of ICE nature-based solutions futures a crucial development in global carbon markets. And that it will help deliver transparency and liquidity for quality nature-based solutions.

Likewise, Elbow River Marketing thinks that it will also bring liquidity to the booming voluntary carbon market.

In August last year, CME Group launched its CBL Nature-based Global Emissions Offset (N-GEO) futures contract. It’s also one of the top nature-based solutions (NBS) contracts available in the market.

CME’s CBL N-GEO contracts consist of offsets from agriculture, forestry, and other land-use projects. They’re verified to have additional climate, community, and biodiversity accreditation.

CBL N-GEO futures contract has the same rigorous certifications as ICE NBS futures. They are also both created to help create a more transparent and efficient voluntary carbon market.

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Chevron, Samsung, and Aramco Invest in $150 Million Round for Carbon Capture Startup

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Carbon Clean, a carbon capture tech startup raised $150 million to ramp up its climate tech solutions for heavy industry.

UK-based Carbon Clean is a climate tech solutions provider that helps industries achieve their net zero goals.

They provide carbon capture, utilization, and storage (CCUS) technologies to heavy industries. These include steel, cement, refinery, energy from waste, and biogas.

The recent Series C investment round bagged the largest equity investment for a point source carbon capture. This is a major step for the firm’s goal of industrial decarbonization on a gigaton scale by the mid-2030s.

Chevron led the funding round for Carbon Clean, along with other new big investors. They include Samsung Ventures, Saudi Aramco Energy Ventures, and AXA Investment Managers.

Other investors are the CEMEX Ventures, Marubeni Corporation, and WAVE Equity Partners.

Carbon Clean’s $150M Carbon Capture Investment

The investment will support the startup’s goal of becoming the world’s leading provider of carbon capture solutions.

Aniruddha Sharma, Chair and CEO of Carbon Clean, said:

“Carbon Clean’s vision is to deliver global industrial decarbonization on a gigaton scale, and we are now on track to do this by the mid-2030s. Today’s funding round is a testament to the confidence of industry and global investors in our technology… And its importance to reach net zero goals.”

In particular, the firm focuses on the heavy industry which accounts for around 30% of global emissions.

To achieve its aim, Carbon Clean will collaborate with industrial partners and governments.

The $150m funding will be for creating hundreds of the firm’s patented carbon capture units for industrial facilities.

The company called its carbon capture technology “CycloneCC”. It’s a fully modular technology designed to fix the two key obstacles to adopting CCUS: cost and scale.

Carbon Clean’s Modular Solution: CycloneCC

CycloneCC is a breakthrough combination of two proven technologies:

Carbon Clean’s advanced, proprietary amine-promoted buffer salt solvent (APBS-CDRMax®), and
A process technology – rotating packed beds (RPBs).

It’s considered the world’s smallest industrial carbon capture technology. It has a 10x smaller footprint than conventional carbon capture technology. It’s also deployable in less than 8 weeks.

Carbon Clean said that its fully engineered and standardized design promotes scalability. It can also reduce the size and total cost of carbon capture by up to 50%.

Best of all, it can drive down carbon capture costs to $30/ton only on average. The storage of captured carbon on a large scale is at around $80 to $90 per ton.

And so, the firm considers its CycloneCC a game-changer for hard-to-abate sectors.

As part of the new funding made for this carbon capture tech, Carbon Clean and Chevron seek to test it at one of the oil giant plants in California.

Chris Powers, Vice President, CCUS for Chevron New Energies said,

“Chevron is proud to lead Carbon Clean’s record Series C funding round… And we’re especially excited about the potential for CycloneCC to revolutionize the industrial carbon capture sector.”

The startup’s latest carbon capture investment follows its $22 Series B round in 2020. It comes as investments into CCUS tech had increased significantly.

Market analysts expect investments in CCUS startups to be more than triple in 2021.

The major driver for this growth is industrial companies’ move to net zero emissions. European climate funding jumped 10x over from £840 million in 2017, to £8.4 billion in 2021.

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Summit Carbon Solutions Announces Over $1 Billion Funding for Carbon Capture Project

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Summit Carbon Solutions announced the successful completion of its $1 billion equity raise for its carbon capture project.

Summit is developing one of the world’s biggest carbon capture and storage project. It plans to capture and store up to 20 million tons of CO2 each year from dozens of ethanol and other industrial facilities across the Midwestern US.

This project involves 5 states and 32 partner facilities. Summit has already raised over $600 million from prior investors. These include Continental Resources, Inc. and Tiger Infrastructure Partners.

In its recent round, Summit has also secured funding of another $400+ million, including $300 million from TPG Rise Climate. The other funding was from South Korea’s SK E&S which has invested $110 million in the project.

TPG Rise Climate is the dedicated climate investing strategy of TPG Rise.

Summit’s $1B Carbon Capture Project

The conclusion of Summit’s fundraising of over $1 billion is part of its joint venture with Minnkota Power Cooperative. Minnkota will give Summit access to the largest permanent CO2 storage site in the U.S.

This carbon capture venture will give Summit a total storage capacity of about 1.2 billion tons of CO2.

The completion of its carbon capture fundraising ensures that Summit gets enough capital to achieve its goals. TPG Rise Climate’s funding completes Summit’s over $1B capital to deliver the project.

The following image shows how this carbon capture project will go about.

These 20 million tons of captured emissions are from 32 corn ethanol plants in five US states.

Captured CO2 will transport through a 3,200 km underground pipeline in North Dakota. The picture below illustrates the project’s proposed routes and sites.

The US offers incentives for carbon capture projects in line with its goal to be carbon neutral by 2050.

Summit will construct its project using the most efficient techniques and practices. These include taking steps to separate and preserve topsoil and move or repair any drainage tile.

The firm will also work with landowners to reroute portions of the line to accommodate future construction plans. It will design the project to cut the impact on all-natural and cultural resources.

In areas where the design won’t work, Summit will work with stakeholders to develop mitigations that limit the eventual impact.

Collaboration with Other Industries

Summit said that executing its carbon capture project needs expertise from various industries. These include agriculture, biofuels, infrastructure, and energy.

According to Summit’s CEO, Bruce Rastetter,

“We have been highly selective with our capital raise by searching for partners who share our vision… And those who bring unique abilities to add value to the company.”

Summit believes that TPG Rise Climate meets those standards. The carbon capture developer was delighted to have TPG Rise as one of its strategic partners.

As for TPG Rise’s Chief Investment Officer, Mike Stone,

“A project of this size and complexity requires both extensive expertise in infrastructure and project development… We are proud to join Summit and other high-caliber investors in this first-of-its-kind project.”

Constructing Summit’s carbon capture project will start in the first half of 2023. While commercial operations will begin in the second half of 2025.

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Delta Air Lines Buys $137 Million Carbon Credits, Focuses on Carbon Removal

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Delta Air Lines bought 12 million carbon credits worth $137 million in 2021.

Delta is a US carrier that’s the world’s second-largest airline by revenue. It’s also one of the world’s oldest airlines in operation that has been around since the dawn of commercial aviation.

The global aviation industry accounts for about 2.1% of all CO2 emissions by humans.

Delta’s carbon footprint is its biggest environmental impact. In fact, 98% of its emissions come from its airplanes.

In its recent 2021 ESG report, Delta revealed its decarbonization pathway to reduce emissions and reach net zero no later than 2050.

The pathway also shows its plan to improve emissions intensity for 2035. These climate targets are pending validation from the Science-Based Targets initiative (SBTi).

Carbon offsets are one of the four levers that the carrier is focusing on to achieve its climate goals. While the three other levers are fleet renewal, operational improvements, and sustainable aviation fuel.

Delta Air Lines Carbon Offsets Program

In 2020, the US airline announced its commitment of $1 billion over the next 10 years to be carbon neutral. It is to fund efforts mitigating all emissions from its global business.

In 2021, Delta invested a total of $137 million in carbon offsets to balance 27 million Mt of unavoidable CO2 emissions.

Delta’s 2021 carbon offsets projects include renewable energy, landfill gas, and preventing deforestation. These offset projects come in three types:

Avoidance

Includes projects that work to avoid the release of emissions:

REDD+: Reducing Emissions from Deforestation and Forest Degradation
LULUCF: Land Use, Land Use Change, and Forestry

Reduction

Includes technologies or projects that increase the availability of renewable energy and convert waste into energy:

Energy Capture
Renewable Energy: projects like solar- and wind-generated power installations

Removal

Involves projects to remove CO2 from the atmosphere and store it:

Carbon Capture and Storage (CCS)
Afforestation

The pie chart shows the percentage of each type of Delta’s carbon offsets by the quantity bought.

Source: Delta Air Lines 2021 ESG Report

As for other net zero levers, Delta achieved the following progress:

Fleet Renewal

Delta took delivery of 52 next-gen airplanes that were 25% more fuel-efficient per seat mile than retired planes. This contributed to a fleet-wide fuel efficiency improvement of 0.8% compared to 2020, resulting in total fuel savings of 22.5M gallons.

In May 2022, the carrier introduced its A321neo, the most fuel-efficient plane. It will help boost Delta’s progress toward emissions intensity improvements.

Sustainable Aviation Fuel

The US airline has set a 10% SAF consumption goal by the end of 2030.

Delta bought from Chevron a batch of co-processed fuel made from a feedstock of soybean oil. This co-processing pilot initiative led to 734 metric tons of CO2 reduction.

Moreover, Delta has signed agreements with 35 corporate customers and travel agencies as of March 2022. They are to fund SAF applicable for emissions from business travels on Delta. This corporate SAF program resulted in 1,747 metric tons of CO2 reduction.

Last March, the airline had closed a deal with Gevo, Inc. to supply Delta with 75 million gallons of SAF per year for 7 years starting in 2025. This agreement replaced their previous deal in 2019 and will boost the carrier’s goal of embracing SAF in its operations.

Operational Improvements

Delta has invested to hit a 25% electric ground support equipment (eGSE) fleet by the end of 2022 and 50% by the end of 2025.

In particular, Delta retired and replaced over 460 pieces of equipment with zero-emissions eGSE in 2021.

As of April 2022, 19% of Delta’s ground support equipment has been electrified.

Also, all 130 Delta 737-900ER planes are now equipped with split-scimitar winglets. This aerodynamic enhancement improves fuel efficiency by reducing lift-induced drag. As a result, the airline expects to achieve annual fuel savings of 8M gallons with this progress.

Delta Climate Advocacy

Going forward Delta expects to spend the rest of its $1 billion pledge on solutions other than carbon offsets as it advances toward net zero.

In its recent Climate Lobbying Report, Delta seeks to focus on investing in technological innovation. This particularly refers to the emerging carbon removal technologies, which include:

synthetic hydrocarbon fuels,
direct air capture (DAC),
carbon capture and sequestration (CCS)

This new lever will support Delta Air Lines efforts to meet its long-term climate goals alongside using carbon credits to offset emissions.

Meanwhile, other major US airlines are also investing their time and money in their race to net zero.

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Chevron Takes Part in First-Ever Carbon Capture Project Offshore

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Chevron joined the first-of-its-kind carbon capture project in Texas to bury CO2 in the seafloor of the Gulf Coast.

The project will be the first to store carbon offshore in the U.S.

Joining Chevron in this pioneering initiative are Talos Energy and Carbonvert, a carbon capture and storage developer.

The goal of the project is to capture CO2 from the smokestacks of industrial facilities in Texas. These particularly include the sites in Port Arthur and Beaumont.

The captured carbon will travel in a pipeline to an offshore tract. It will then be pumped into the seafloor under Texas-owned waters on the Gulf Coast.

The image below shows how carbon capture works in a typical underground CO2 injection.

Chevron’s Bayou Bend Carbon Capture and Storage Project

Chevron project partners, Talos and Carbonvert, made a joint venture called the Bayou Bend CCS – carbon capture and storage. It’s the first-ever and the only offshore lease devoted to CO2 sequestration.

Under their MOU, Chevron takes the majority stake in exchange for cash and capital needed by the project. Equity shares in their joint venture would be 50% for Chevron and 25% for each of the other two companies.

Bayou Bend CCS is the winner of the lease bidding process held by the Texas General Land Office last August. The agency handles state-owned lands and mineral rights.

Chevron’s carbon capture project Bayou Bend gave the three partner firms access to over 40,000-acre expanse on the Gulf Coast.

They estimated that this area can store 225 to 275 million metric tons of CO2. That amount equals around 40% of Texas’ energy-related CO2 emissions in 2019.

The Role of Carbon Capture and Storage in Reducing Emissions

Climate justice advocates find carbon capture and storage a controversial CO2 reduction option. They contend that CCS will further extend the use of fossil fuels and the facilities that use them.

But for major industries, carbon capture is one of the few measures they can opt to cut their emissions. This is true in the case of oil and gas, cement, and steel industries.

And so, Chevron invested in the Gulf Coast carbon capture project. Other firms and governments also think that the location is perfect for this pioneer CCS.

The site has a high concentration of industrial facilities and a big potential to capture CO2 offshore.

Estimates from the Department of Energy show that geologic formations in the area are great. It has the capacity to sequester hundreds of billions of metric tons of CO2.

In October 2021, Exxon Mobil suggested turning the 50-mile-long Houston Ship Channel into a CCS hub. This hub will carry the CO2 in pipelines and inject it deep under the seafloor of the Gulf of Mexico.

The oil and gas giant called on public and private sectors to raise $100 billion for that aim. Chevron is one that got interested in this carbon capture venture.

What’s in it for Chevron?

The CCS solution can get so costly but there’s a tax credit accessible to help project developers. It’s called 45Q which offers as much as $50 for each ton of CO2 kept underground for a long time.

But it remains a question of how the Bayou Bend CCS project can benefit from the tax credit. Plus, there’s no existing regulation requiring firms to capture their CO2 emissions.

Yet, Chevron gets inspired by the climate threat and growing pressure from investors. The energy firm also has properties on the project site. It includes its Phillips Chemical plant in Port Arthur which violated the Clean Air Act.

The company faced penalties from the US Justice Department and
the CCS project is a part of its efforts to address the sanctions.

Chevron also announced a $10 billion dollar investment into low carbon business initiatives last year. Half of that budget will be spent on reducing emissions from fossil fuel initiatives. And $3 billion is for carbon capture and offsets.

The Bayou Bend project is in its very early stage and it will take a long way to materialize.

Chevron and its partners need to do “extensive site characterization” first before the carbon capture project can start. They also have to get a permit from the Environmental Protection Agency to begin drilling.

Still, the parties to this joint venture are optimistic about its potential.

According to Talos CEO and president,

“Chevron brings significant expertise and experience to this project… and we are excited about what this partnership can deliver.”

While Carbonvert’s CEO said that,

“We look forward to the opportunity to partner with Chevron on such a monumental project supporting decarbonization and partnering with customers on their paths to net zero.”

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California Forest Carbon Buffer Pool is Not Enough

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A study showed that California’s forest carbon offsets buffer pool is undercapitalized and does not fully cover the risk of increasing fires.

Last year, Governor Newsom of California signed a $15 billion environmental package that funds programs to tackle droughts, clean energy, and climate change. $1.5 billion of that fund is for wildfire prevention.

This comes after California’s devastating wildfire season which seems to get worse with each passing year.

The state has a huge forest carbon offsets program that credits carbon stored in forests. These carbon credits are open for those who seek to offset their emissions.

The bulk of these credits is in California’s cap-and-trade credit scheme. It’s also known as the emissions trading system (ETS).

ETS is a regulated carbon credit market wherein government sets the full emissions limit and affects the credit prices. Emitters buy or sell (trade) credits based on their emissions and in relation to their limit (cap).

California is one of the world’s major ETS, along with EU ETS and China ETS. But the state is also home to the biggest and deadliest wildfires in the U.S.

And so, the state created its so-called buffer pool.

California’s Forest Carbon Buffer Pool

Though forests can store big amounts of CO2, their storage capacity is not durable. This is because they’re subject to risks that can re-emit the stored CO2 into the atmosphere.

The concept of the permanence of the forest carbon offsets program is very important.

CO2 emissions have significant impacts on the environment. They could last for hundreds to thousands of years but CO2 captured and stored in carbon pools like forests may be temporary.

To address this, California developed a self-insurance program called buffer pool. It’s created to offer a 100-year guarantee on forest carbon claims made by offset projects.

Offsets are reported to the California Air Resources Board (CARB) and other registries.

When projects are registered, the relevant registry performs an analysis of the reversal risks. Then the project has to set a certain percentage contribution into the buffer. The amount will balance the reversals of registered offsets that may happen.

California’s buffer pool consists of these four key components:

Wildfire
Disease and insects
Drought
Financial and management risks

Funding for California’s forest carbon buffer pool is from offset credits issued by the CARB.

Since the program started until January 5, 2022, there’s a total of 31.0 million credits given to the buffer pool. This represents 13.4% of the total 231.5 million issued credits.

The 31.0 million credits ensure a total of 200.5 million credits portfolio against the risks of reversal.

The number of credits contributed to the buffer pool depends on certain risk factors. But their composition is from those four main components.

For instance, projects must give around 2% to 4% of their credits to account for wildfire risks. While for projects that apply wildfire management practices, the credit share is lower.

Moreover, projects must also allot a fixed 3% of gross credits for disease- and insect-related risks. Plus, there’s another 3% for natural disasters like floods, wind, and ice.

Lastly, offset projects must also provide around 1% – 9% of gross credits for various financial and management risks. These include bankruptcy, land-use conversion, and excess timber harvesting.

The figure below illustrates California’s total buffer pool and each component’s credit shares.

Credits in the buffer pool are retired to cover carbon losses due to events like drought or wildfire.

So long as the buffer pool stays solvent, the permanence of carbon offsets remains intact.

But a study suggested that California’s buffer pool severely lacks capital.

It’s also unlikely to insure the integrity of the program’s forest offsets for a century.

The analysts used 6 projects affected by wildfires in California from 2015 to 2021. Two of them have already reported verified reversals that resulted in credit retirements. While four projects weren’t verified yet and so researchers use proxy fires instead.

They base the calculation of the expected carbon reversals of the projects on the offsets program’s accounting rules.

The table below shows the 6 carbon offsets projects studied.

Researchers found that wildfires in California had depleted almost 1/5 of its forest carbon buffer pool in less than a decade. This is equal to 95% of the total contribution set for fire risks for over 100 years.

In fact, the Lionshead Fire in 2020 affected only a single forest offset project. Yet, it accounted for about 10% of the total forest buffer pool for that year.

The wildfire burned all 24,000 acres of the Confederated Tribes of Warm Springs’ forest offset project. The offset reversal caused by the fire was equal to 2.6 million credits withdrawn from the forest buffer.

This and other big carbon losses by record-breaking 2020 and 2021 wildfires showed the vital role of California’s buffer pool.

Forecasts also show that wildfires will continue to grow in intensity and size. And that’s due to the growing climate risks and increasing temperature levels.

But the buffer pool didn’t account for the increase in fire risks.

Failure to factor in such a growing risk of wildfires means that the forest fire-prone state will likely face high offset reversals.

The researchers noted that,

“California’s forest buffer pool is likely to experience mounting losses that far exceed its design criteria in the decades to come.”

They also showed that potential carbon losses from a single forest disease or a sudden oak death can take up all credits set for these risks.

Hence, California’s forest buffer pool is very short of capital as per their analysis. As such, they conclude that the program will be unlikely to guarantee the integrity of California’s forest offsets program for 100 years.

With this, many are wondering if it will lead to changes to the way the CARB and offset registries manage their buffer pool for forest carbon credits.

Whether they will or not, the fire season is coming and the risk is rising.

The post California Forest Carbon Buffer Pool is Not Enough appeared first on Carbon Credits.

What Does “Net Zero Emissions” Really Mean?

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The recent report from climate scientists is crystal clear: the world must act now. That means limiting global warming to 2 or 1.5 degrees Celsius.

But what does this entail?

Cutting a lot of emissions and reaching net zero. And this is urgent.

Embracing the urgency of this matter, more and more entities are pledging their net zero targets. There are now over 80 nations and hundreds of businesses that laid out their net zero roadmaps. These include the world’s supper emitters – China, the United States, the European Union, and India.

But what does achieving net zero emissions really mean?

This guide will explain the key facts and insights about this world-saving concept.

What Does Hitting Net Zero Emissions Mean?

Being at net zero emissions refers to a point where the GHG emissions released by humans into the air are balanced by the emissions removed from the air.

Think of it as a weighing scale. Emitting carbon and other GHG tips the scale and the net zero aim is to get the scale back into balance.

Reaching this balance requires two things.

Reducing the emissions released from human activities closest to zero.
Removing the emissions that are hard to reduce.

Getting to net zero means we can still generate some emissions. But as long as they are offset by initiatives that reduce GHG already in the atmosphere.

There are plenty of carbon removal solutions and technologies being developed to suck in CO2 from the air and store it.

So, emission reductions and removals go together in the world’s race to net zero.

When Must The World Get to Net Zero?

Every new ton of carbon emitted into the atmosphere is heating the planet more. The sooner the world stops adding CO2 and other GHG to the air, the better. But what’s the timeline for this?

As per IPCC’s latest report, to honor the Paris Agreement and limit temperature rise at 1.5°C, global emissions should be at net zero by 2050.

Still, hitting net zero in 2050 is too far distant away. Short-term emissions reduction targets are necessary. The Paris accord requires countries to reduce emissions by 7% each year this decade (from 2020 to 2030).

Climate science suggests a global timeline to be at net zero under two scenarios: limiting warming to 1.5°C and to 2°C.

The figure below shows this timeline. It separates two significant emissions – carbon dioxide and total GHG.

What the picture depicts is that achieving net zero CO2 emissions must be by 2050 (1.5°C) or by 2070 (2°C) at the latest. Whereas for non-CO2 emissions, it means by 2060 and by the end of the century.

The sooner emissions peak, the more realistic hitting net zero becomes.

This scenario results in less dependence on removing carbon beyond 2050.

But this timeline doesn’t say that all countries need to be at net zero at the same time. There are a lot of factors to consider here including:

Responsibility for past GHG emissions
Per-capita emissions
Capacity to act

This suggests that the deadline for the wealthier, higher emitters could be earlier. The opposite holds true for poorer emitters.

For instance, India has net zero targets by 2070 while Saudi Arabia and China both pledged to be at net zero by 2060.

Whereas the US, EU, UK, and Japan have all committed to hitting it by 2050.

But it’s crucial not just for countries but also for companies to have net zero targets. More so, their near-term emissions reduction goals must align with their net zero pledges.

Why It’s Vital to Align Interim CO2 Reduction Targets with Net Zero Plans?

Entities often set their net zero targets by 2050.

But to ensure that they’re on track toward their net zero pledge, their long-term goals must inform their interim targets.

This is critical to prevent locking in carbon-intensive and non-resilient infrastructure and technologies. It can also help them align the costs by investing in projects that can cut emissions now and still do so years later.

This is more vital for countries to design consistent policies that support reduction efforts in the long run. Also, countries party to Paris Agreement and COP26 agreed to submit their climate plans.

Such plans form part of their NDCs or nationally determined contributions. The NDCs outline interim emissions targets by 2030 and align governments’ climate plans with their near-term goals.

Most countries with net zero targets are starting to incorporate them into their interim NDCs. Here’s the current global map of countries that have net zero ambitions and their status.

Source: ClimateWatch Net Zero Tracker

More importantly, the corporate world had also paved its path toward net zero emissions.

World’s Heaviest Emitting Companies With Net Zero Targets And Strategies

According to BloombergNEF (BNEF) analysis, 2/3 of the world’s heaviest emitters set their net zero goals. These focus companies (100+) represent over 80% of global industrial GHG emissions.
 
BNEF estimates that the net zero targets of those companies will cut emissions by 3.7 billion metric tons of CO2 equivalents in 2030. And by 2050, reductions will become 9.8 billion Mt. This is equal to over a quarter of global GHG emissions today.
 
The chart below shows the emission reductions for those companies per sector.
 

The oil and gas sector accounts for over a third (3.4 GtCO2e) of targeted reductions, more than any other sector.

European oil majors have set net zero emissions targets by 2050 last year like Shell and Total. They already made some progress by investing in low-carbon initiatives.
 
The same goes with some US oil majors ExxonMobil, Occidental Petroleum, and Chevron.
 
In particular, Exxon pledges to reach net zero global operations by 2050. Part of this climate goal is a couple of key promises such as:
$15 billion towards reducing GHG emissions over the next six years
Better processes to reduce methane gas leakage

To reach net zero within the U.S. Permian Basin shale field by 2030

Exxon also bid the highest to get offshore properties to use for carbon sequestration.

Likewise, Chevron also announced a $10 billion dollar investment into low carbon initiatives as part of its net zero targets.

Half of that budget will be for reducing emissions from fossil fuel initiatives. The remaining half will be for hydrogen energy and renewable fuels.

Specifically, Chevron will increase:

Renewable fuels production to 100,000 barrels per day
Renewable natural gas output to 40 billion British thermal units (BTUs) per day.
Hydrogen production to 150,000 tonnes per year
Carbon capture and offsets to 25 million tonnes per year.

Meanwhile, Occidental Petroleum has also set its net-zero ambition by 2050. Like other oil majors, Occidental also invests in direct air capture (DAC) technology as one of its net zero strategies.

The firm expects to pull as much as 1 million metric tons/year of CO2 emissions via DAC.

The second heaviest emitting sector is the utilities with 2.3GtCO2e.

Italy-based Enel, one of the world’s biggest utility firms, has an initial net-zero emissions target by 2050 but moved it to 2040 instead. The firm also expressed to exit coal generation by 2027 and gas by 2040.

Enel plans to invest $160 billion to fund its net zero strategies to reach its ambitious goal. Part of that is to install around 154GW of renewable capacity by 2030.

Duke Energy also set ambitious climate goals. That’s to have at least a 50% reduction in CO2 emissions from electricity generation in 2030 on its way to net zero by 2050. They’re also targeting net zero methane emissions for their natural gas distribution by 2030.

The third sector with high emissions is manufacturing (1.4GtCO2e) which includes automakers.

While the utility companies are turning to renewables, car manufacturers are becoming electric.

Tesla led the way in its all-electric lineup and amassed huge carbon credit sales for it. It also produces green products that further add to its credit generation. Yet, it still hasn’t revealed its net zero goals.

Stellantis, on the other hand, has pledged to hit net zero emissions the soonest time by 2038.

While it used to rely on Tesla to meet its regulatory emissions, the European carmaker managed to cut down its emissions.

It was through its electrification ramp-up and technical improvements. This includes its battery electric vehicles (BEVs) and low-emission vehicles (LEVs) production.

To become carbon net zero in 2038, the carmaker focuses on these main levers:

Energy-efficient projects and energy management in all plants
Site compression and improvement of industrial footprint
Use and production of renewable energies
Technical innovations (e.g. Hydrogen, Power to gas)
CO2 capture and storage

Other manufacturers also made significant strides in their way toward decarbonization. Take for example the case of Del Monte Foods.

Del Monte Foods has invested significantly in renewable energy and reduced food waste. It also doubled capital investment in energy-efficient production operations.

The company’s strategy to reach net zero emissions by 2050 is to invest more in:

Renewable energy,
Automation,
Transportation efficiency,
Regenerative agricultural practices, and
Eco-friendly packaging innovation

Though they’re not directly specified as a sector in the chart above, the airlines are also one of the big emitters.

In fact, the global aviation industry generates around 2.1% of all CO2 emitted by humans. Within the transport sector, it accounts for 12% of emissions compared to 75% from road transport. 

Here’s how the major US airlines are dealing with their net zero targets.

The Way to Net Zero 

It is certain that the world needs to take action and treat climate change as an emergency.

And the only means to face this emergency heads on is for countries and companies to hit their net zero emissions.  

There’s no single approach to how the world reaches net zero by 2050 or earlier. It requires a combination of various initiatives or strategies as to how different companies are doing it.

Another major element of that is setting near-term climate targets that align with long-term goals.

This will help investors assess the climate ambitions of their portfolio companies. It will also help corporations to have a good benchmark as they go on their journey to net zero.

The post What Does “Net Zero Emissions” Really Mean? appeared first on Carbon Credits.