- Carbon offsets will be necessary tool in meeting global greenhouse gas reduction initiatives in the steel industry.
- The U.S. market for offsetting carbon is, for right now, a predominately voluntary market.
- With most transactions occurring off-exchange price discovery is difficult.
Following the 2015 Paris Agreement and COP26 that followed, momentum is building globally to reduce greenhouse gas (GHG) emissions with goal of limiting climate change to no more of an increase than 1.5 deg C.
The global steel industry represents demand for steel close to 2 billion tonnes and too, represent around 7% of global GHG, or 2.6 billion tonnes of CO2. The majority of global steelmaking is in countries with net zero 2050 carbon emission targets.
Although there are exciting projects representing innovative ways to produce steel using new hydrogen based technology, and eliminating CO2 emissions from the steelmaking process, there is no way in the coming decades that this technology can be implemented at a scale necessary to meet global demand for steel.
A CARBON OFFSET IS PRODUCED WHEN A PROJECT IS UNDERTAKEN ANYWHERE IN THE WORLD TO REDUCE, ELIMINATE OR CAPTURE CARBON EMISSIONS.
Accordingly, carbon offsets, or carbon offset credits, will provide steel industry participants ability to neutralize their carbon footprint. In simplest terms, a carbon offset is produced when a project is undertaken anywhere in the world to reduce, eliminate or capture carbon emissions. The two types of projects are, avoidance/reduction and removal/sequestration. The financial support of that project, by ultimately buying the offset being created, represents the supporting party’s opportunity to offset their GHG emissions. More or less, a company is investing in a green project in order to neutralize their own emissions resulting from their commerce.
Examples of carbon offsetting projects as you can imagine include forestry projects. Protecting rainforests in Brazil or replanting mangroves in Madagascar would be examples. By supporting solar, wind and hydro projects that add to the amount of renewable energy on the grid, carbon credits are created (though sometimes referred to as renewable energy credits or RECs). On a smaller scale, community focused projects such as providing clean cook stoves to replace traditional wood and charcoal stoves can offer more than just a philanthropic benefit by too, creating direct financial benefit of carbon credit.
The quality of these projects is ultimately verified by registrars such as Verra and Gold Standard. These organizations are non profit entities that develop and manage standards that define the value of an offset project. They further register the offsets and account for them thru their lifecycle. The offsets, once purchased by the consumer, can be held, traded or retired (when used to offset particular emissions).
GREENWASHING
Greenwashing is a term used to suggest that companies are simply covering up for their own unethical climate behavior by purchasing offsets. Regardless of this idea, as the world moves more towards net zero carbon economies, offsets are necessary. And too, reducing GHG anywhere in the world has benefit provided the world. It’s one non-localized atmosphere after all. And the reality is, low hanging fruit regarding GHG emission reduction around the developing world, provide for financially efficient and effective means to reduce GHG emissions that make good sense to undertake. For sure, the “quality” of an offset is an important component to consider. And that is the importance of valued registrars with a history of bringing high quality offsets to the market.
The registrar is responsible for accounting for who is holding on to them and when they have been retired. The quality of carbon offsets can also be defined by compliance to The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), a global market-based measure designed to offset international aviation CO2. Offset futures, GEO traded on CME for example, must be CORSIA compliant.
THE BOTTOM LINE
All of this being said, what is a carbon offset, what determines the recognition and quality of an offset, and who registrars the offsets… what does an offset cost? Remember that the U.S. market right now is predominately a voluntary market.
The EU market is regulated under cap and trade. The EU market has a transparent price placed on carbon emissions under their trading scheme. We can see a similar cap and trade scheme and quoted prices under California’s Air Resources Board. But the voluntary market in the U.S.? It is not as easy to discover price and assign value.
- Are you getting a good deal for your investment?
- How does that compare with offset prices last month or last year?
- What do we expect prices to be next year?
Trading on the CME are GEO futures. Further, S&P Global Platts and Viridios Capital had launched in 2021 AI driven carbon indices in attempt to provide transparency in voluntary carbon markets.
Through the remainder of the 2020’s the market for carbon offsets will become more important and prevalent as countries embark on meeting the GHG emission targets being set for 2030 and mid century 2050.
Although the U.S. is mostly operating as a voluntary market and differs from the EU being a regulated cap and trade market, that doesn’t mean expectations for meeting GHG emission targets will be less. Investor sentiment regarding sustainability and access to capital will all dictate the speed at which this market becomes more adopted.
Companies operating in the steel and metals industry will do well to begin creating their GHG emission strategies today. It will mean having your eye on the ball so to speak and provide you opportunity to adapt and respond to the market as it evolves in the coming years. Understanding your company’s carbon footprint is your first step towards understand how carbon offsets will be used to support your business and meet your customer expectations.
