A new El Dorado for commodity traders

Natural gas labelled "CO₂-neutral" or concrete with "net zero" certification: the list of seemingly climate-neutral consumer goods has grown steadily over recent years. The accounting trick behind carbon offsetting is that a greenhouse gas emitter – whether a company, an individual or a country – pays for another player to avoid, reduce or cease their emissions. This enables companies to market themselves as they see fit by presenting themselves to their customers as committed climate protectors, even though they are not reducing their own emissions. The voluntary carbon market has reached a crossroads, oscillating between an outright boom and the crisis of confidence recently triggered by greenwashing allegations.

On the one hand, there is the economic reality of a voluntary carbon market, which quadrupled to USD 2 billion in 2021 alone – and could well reach USD 50 million by 2030 – and which is attracting strong interest from the biggest emitters, foremost among them commodity traders. This exponential market growth is attributable, in part, to the growing number of "net-zero" commitments by the private sector in the face of popular pressure and, in part, to the economic and logistical alternative that offsetting represents compared with reducing carbon footprints. On the other hand, damning reports about the poor quality of voluntary carbon market projects are coming thick and fast. They caution against the unbridled development of a market whose real impacts on climate protection is depicted as ranging from negligible to downright counterproductive. The ETH Zurich and the University of Cambridge have shown, for example, that a mere 12 per cent of all existing credits in fields where most offsetting occurs – renewable energies, cooking stoves, forestry and chemical processes – actually reduce emissions. Reports on the flagship South Pole project Kariba by the investigative journalism platform Follow the Money have told of vastly overestimated figures. The Zürich-based company then cancelled its contract as Carbon Asset Developer for the project in Zimbabwe. As for the NGO Survival International, it denounces a voluntary carbon offset project in northern Kenya, which is taking place on land belonging to indigenous communities. Their investigation uncovered potentially serious human rights violations that are jeopardising the living conditions of local livestock farmers.

What then is the voluntary carbon market? An ill-conceived marketing solution and dangerous distraction from the urgent need for transformative climate protection measures by the private sector? Or a genuine business opportunity to support corporate efforts to tackle climate change and a much-needed multi-billion-dollar cash injection for projects to cut emissions and protect the biodiversity in developing countries?

CO₂ certificates – the commodity of the future

As a pioneer in the bilateral trade of CO₂ certificates under the Paris Agreement, Switzerland is a key player in the carbon market, including in its voluntary segment. It is home to South Pole, the leading provider of voluntary CO₂ certificates, and to Gold Standard, the second largest certifier. Perhaps more surprising is the market positioning of the Swiss and Geneva-based commodity trading giants, admiralships of a commodities sector that is posting one record a year after another. These new investments are explained by the potential of this opaque market to generate substantial margins and prolong business as usual. It is worth noting that this market is unregulated when it comes to prices or the distribution of revenue from CO₂ credits. According to Hannah Hauman, Trafigura's Head of Carbon Trading, the carbon segment is now the world's biggest commodity market, having already overtaken the crude oil market.

In 2021, Trafigura – one of the world's largest independent oil and metal traders – decided to open its own carbon trading office in Geneva and to launch the largest mangrove reforestation project on the Pakistani coast. A year later, however, its coal trading volume increased to 60.3 million tonnes. In its 2022 annual report, not only did Geneva-based energy trader Mercuria declare its carbon neutrality, it also disclosed that 14.9 per cent of its trading volume comprised carbon markets, versus 2 per cent in 2021. In early 2023, Mercuria co-founder Marco Dunand announced the creation of Sylvania, a USD 500-million investment vehicle specialising in nature-based solutions (NbS). Shortly thereafter, he launched the first jurisdictional programme with Brazil's Tocantins State to cut emissions from deforestation and forest degradation, with a volume of up to 200 million in voluntary carbon credits. Even so, at almost 70 per cent, oil and gas still make up the company's main business. Vitol, Mercuria's neighbour on the shores of Lake Geneva and the world's largest private oil trader, can look back on over 10 years of experience in carbon markets and is considering expanding its activities in that field. In carbon trading, the company is aiming for a market volume comparable to its share of the oil market. For 2022, that share was 7.4 million barrels of crude oil and oil products per day, which corresponds to more than 7 per cent of global oil consumption. Communication is less transparent from crude oil trader Gunvor, which is also planning to ramp up its CO₂ trading volume in the years ahead; the same goes for Glencore, which has a years-long track record in the area of biodiversity-related offset payments,  central to its sustainability strategy. For 2022, Glencore estimated its emissions throughout the value chain to be 370 million tonnes of CO₂ equivalent, or more than three times Switzerland's total CO₂ emissions.

These companies describe themselves as drivers of the transition, and take credit for having accelerated that process by incorporating carbon trading into their portfolios. The fact remains that they are pursuing a two-pronged strategy by investing in both low-carbon and fossil fuels, with the latter still clearly dominating. Besides, none of these commodity traders has yet announced their intention to phase out fossil fuels, which is indispensable if we are to remain below the 1.5°C temperature increase stipulated in the Paris Agreement. The opposite is the case: companies are relying heavily on carbon offsetting to fulfil their climate undertakings, and this allows them to continue pursuing their short-term profit targets while delaying the worldwide phase-out of fossil fuels. Given the absence of regulations to limit fossil fuel investments and climate-degrading activities, it is illusory to think that the commodity trading industry can bring about the transition and that the goals can be attained through the voluntary carbon market. So long as companies fail to do the utmost to lower their own emissions, nature-based solutions will remain greenwashing, and declarations of intent in favour of the transition will be no more than a sham. These companies are pretending to put out a massive fire that they themselves keep feeding.

Dubai as referee

The UN Climate Change Conference (COP28), taking place in Dubai in December 2023, is expected to set the course for the future and the credibility of the voluntary carbon market. Among other things, the negotiations will cover the implementation of Article 6.4 of the Paris Agreement, which could serve as a harmonised framework for a genuine worldwide carbon market. And to this end, the prominent role of COP President Sultan Al Jaber, CEO of the world's 11th largest oil and gas producer, the Abu Dhabi National Oil Company (ADNOC) – which has just opened a carbon trading office – and the massive presence of fossil fuel and commodity multinationals at the negotiating table could well tip the balance. The requirements in respect of transparency, generally applicable rules and effective controls in the voluntary carbon market are therefore likely to be watered down.

While advocates of the voluntary carbon market acknowledge some of the sector's current shortcomings, they remain convinced that the various self-regulation initiatives, such as the Voluntary Carbon Markets Integrity Initiative (VCMI), and the formulation of standards will lead to a clear demarcation of credible carbon credits. Opponents, for their part, do not believe in the transformative power of a voluntary, self-regulating market. They see the discussion around carbon offsetting as a possible diversionary tactic that reinforces the status quo. They argue for a complete paradigm shift. The current carbon offset market based on the "tonne for tonne" principle – i.e., a tonne of CO₂ emitted somewhere is mathematically offset by a tonne of CO₂ saved elsewhere – should be transformed into a separate market for climate contributions based on the "tonne for money" principle, i.e., a tonne of CO₂ emitted somewhere is financially internalised at the true social cost of a tonne of emissions. Thus, by setting a sufficiently high internal price for their residual emissions, carbon credits would become the expression of the environmental and historical responsibility of the private sector, without the latter being able to claim paper carbon neutrality. Only then would this instrument be a useful complement to quantifiable reduction commitments – and never a substitute for them! There is also an urgent need for rigorous due diligence for all carbon projects, including mechanisms to safeguard human rights and the biodiversity, as well as an effective complaints mechanism.