I Think I Shall Never See a Carbon Offest as Lovely as a Tree
I was reading an article last week from Bloomberg titled, Egypt’s Barren Fields Are Dire Bellwether for Climate Summit. Here is how it started,
The planet is heating up, but Egypt is warming at a faster pace—making it a bellwether for the painful effects of climate change. The Nile Delta, the breadbasket of Egyptian civilization and where Abdel Salam farms, is gradually turning barren. “I’ve been working on this land for more than 50 years now. I saw wars, revolutions—big changes,” he says. “But water is my biggest worry.”
Environmental Social and Governance (ESG) investing gets a ton of press these days. For some it is the ability to use one’s capital to perhaps make a little less money to save the planet. To others it is a woke, commie conspiracy to destroy the American way of life. To me it is what George Carlin once described as the manufacturing, packaging and distribution of bullshit….bullshit that is on a scale of epic proportions, bullshit that actually does the complete reverse opposite of what it is supposed to do, slow down climate change.
At the same time as I was reading about the dire circumstances in Egypt, there was a great article, also from Bloomberg titled What Really Happens When Emissions Vanish.
The story showed how corporations strive to gain credit for reducing their C02 emissions through the use of Renewable Energy Credits (RECs). Unfortunately, all these companies have done is maintain or improve their ESG rating and increased their stock price.
One buyer of RECs, Procter & Gamble maintain that in 2020 they nearly halved their C02 emissions by a whopping 2 million metric tons from 2019. Magically, they did this without making significant investment in more energy efficient technology. They did it through the purchase of RECs from renewable (wind and solar) energy power plants. The purchased RECs offset P&Gs C02 emissions and presto, they disappeared! Except not really.
The way RECs theoretically work is, renewable energy plants receive RECs from government agencies like the EPA. The RECs are a market-based instrument that can be sold. High C02 emitters, rather than invest significant capital to reduce emissions, buy renewable energy plant’s RECs and apply them against their real emissions. Renewable energy producers then, theoretically take the proceeds and expand the production capacity of renewables.
Unfortunately, at least a decade of research and experience by renewable finance veterans, academics and even Walmart have stated that the purchases made by the likes of P&G do little to stimulate new investment by existing clean producers. There are genuine agreements between corporations and renewable producers called long-term power purchase agreements (PPAs). These agreements are long-term and risk of the investment in new capacity is shared between the buyer of the PPA and the renewable producer. RECs ain’t that.
Walmart actually put it best when they said that REC investing was, “simply shifting around ownership of existing renewable electrons” without “the desired impact of accelerating renewable energy development.”
Here is something really madening from the same report
Companies can make meaningful cuts to their pollution with this approach, but progress can be slow and expensive. For instance, Lowe’s Cos., which operates 2,200 home improvement stores in North America, spent $68 million in 2020 to upgrade lighting and air-conditioning equipment at hundreds of stores. The new energy-sipping equipment helped trim its electricity use by 11%. The result: a very real 9% drop in emissions. (emphasis mine)
Many companies are reluctant to spend this kind of capital, even if it eventually saves money through lower energy bills; those that do find it hard to replicate these kinds of improvements year after year. Others are tantalized by the prospect of marketing dramatic climate improvements to their customers or even declaring their businesses to be carbon neutral (emphasis mine)
Reluctant to spend this kind of capital!! Isn’t that supposed to be the whole point of ESG?? Your company makes real strides to reduce emissions and I will invest EXTRA in you through a neat ESG fund, which in turn lowers your cost of capital to pay for upgrades, etc.
But wait, there’s more!
Also last week the Wall Street Journal put out an article Wall Street Firm Makes $1.8 Billion on Forest Carbon Offsets I am not sure if this one is better or worse than the REC one, probably more diabolical but at least has a chance for at least some positives? Maybe? Probably not
Oak Hill Advisors purchased over 1.7 million acres of hard-wood forest across a number of states in the U.S.A for $1.8 billion. However, rather than log for timber, Oak Hill will be paid in Forest Carbon Offsets to not log. As we learned in grade school, trees eat C02 so, by keeping them away from the lumberjack’s axe Oak Hill is saving the planet and receives Forest Carbon Offsets from government agencies. Oak Hill will then sell these carbon offsets to companies like P&G so they can show that they are being good little stewards of the planet. Many large energy companies are also buying up forests to offset their own carbon footprints as well. It kind of make sense until you put your skeptics hat on. From the WSJ article,
Critics of offsets say that many promised harvest reductions are merely theoretical, either because the forests are too remote or rugged to be logged economically or the owners aren’t generally in the business of clear-cutting. And that even when there are fewer harvests, demand from mills means more intense logging elsewhere. An overarching criticism is that offsets allow companies to pay a relatively small price to avoid reducing emissions. (emphasis mine)
I have no idea who makes sure that the sellers of the carbon offsets are actually doing what they are supposed to be doing (not logging), whether they are selling the same offsets to multiple buyers, etc. Details details. I think from past experience we can assume that nobody has any idea what is really going on with these offsets and there’s probably lots of badness afoot. For Oak Hill to make a return on $1.8 billion they have a lot of wood to NOT chop. I’m sure everything will be on the ol’ up and up though.
The WSJ finished off ominously,
In a small plot where the trees were measured to serve as a sample for how much carbon is held in ecologically similar parts of the property, she pointed out what would be wasted in a typical harvest but has value in carbon markets: holly bushes and sweet gum that fall under equipment treads, a towering yet hollowed beech, and a black cherry bent like a lightning bolt and unsuitable for a sawmill. (emphasis mine)