Mobius Risk Group, vice president corporate strategy and development, Drew Lichter, explains how carbon credits and offsets can reduce shipping’s carbon footprint
The last several years have been characterised by increasing global focus on Environmental, Social, and Governance (ESG) factors. What began with regional regulation of power generation has morphed into accelerating investor, financier, customer, and stakeholder expectations of a move towards carbon neutrality across all businesses, and particularly energy, heavy industry and shipping.
There are three ways companies can reduce their carbon footprint. The first is efficiency: by using lower-emissions fuel blends or optimising speeds and routes for fuel efficiency. The best it can ever do is reduce, not eliminate, emissions. The second is with the introduction of new technologies. Technology that is currently commercially viable is emissions reducing, not eliminating, and fully clean-fuel technology is many years away. Technology may represent the future, it is not likely to be commercialised in time to meet zero-emissions mandates and commitments already in place. This leaves the third option – a market-based approach using carbon credits and offsets.
Carbon credits and offsets are both financial instruments representing one tonne of CO2 emissions. However, they differ in their creation and application. Credits represent the right to emit one tonne of CO2. They are issued to existing emitters based on baseline emissions; as they reduce emissions, they are able to sell these credits to other emitters who are unable to reduce their footprint.
In theory, supply is managed such that an across-the-board reduction in emissions will be required, with price inflation increasingly incentivising desired behaviours. The most mature example of carbon credits is the EU ETS.
Offsets represent a one-tonne reduction in CO2 from a new emissions reduction project, such as renewable energy. These projects are then verified by various registries to ensure they meet standards around audit trail, additionality, permanence, leakage, and double counting.
“Offsets represent the only option in the near term to be net neutral”
Unlike credits, offsets are purchased in the open market, either directly from a project developer or through brokers. While credits and offsets are sometimes criticised as an artificial approach or “greenwashing”, this is not true in the case of a high-quality project. By purchasing a high-quality offset, you are de facto financing the reduction of a tonne of CO2. Carbon neutrality does not mean zero emissions – it means zero net emissions and provided the one-tonne estimate of an offset is accurate, it accomplishes this goal. Moreover, for industries such as transportation for which it is impossible to become zero emissions through efficiency and technology, offsets represent the only option in the near term to be net neutral.
One of the challenges faced by shipping companies is the diverse client bases in multiple industries, investor bases, and legal and regulatory requirements. While some might be willing to pay a premium for carbon-neutral freight, many are not, and it is not yet feasible to become fully carbon neutral and remain profitable. Carbon offsets solve this issue, by allowing shippers to offer carbon-neutral freight as an optional service, simply by bundling offsets with freight or fuel charges.
Global supply chains will continue to require ocean freight, and green raw materials and goods will require green logistics. ESG and carbon neutrality are increasingly becoming essential core capabilities for all industries, and shippers who adapt will be uniquely positioned to not only survive the coming changes, but to capitalise and thrive now and in the future.
*Mobius Risk Group is an independent commodity advisory firm providing market guidance to producers, consumers, and capital market participants needing timely and effective risk management support. Mobius is a Houston, Texas based, private company founded in 2002 with US $200Bn in advisory market cap and over US$20Bn a year in transaction volume, Mobius leverages proprietary technology, industry leading analytics, and deep market expertise to drive value across its clients’ organisations.