Offsetting must be used as a last resort on the journey to net zero

Sophie Haas, head of sustainable investing at JP Morgan explains the need for incentives and investments into both mature and innovative solutions to achieve net zero

The planet is in a critical phase and will require radical reform if we are to remain below the 1.5⁰C warming threshold. Decarbonisation must happen at an accelerated pace, and this will once again be a hot topic at COP27 as world leaders seek consensus on getting closer to achieving net zero.

Decarbonisation is the process of reducing greenhouse gas emissions and it usually refers to the drawdown of emissions to net zero. For hundreds of thousands of years, atmospheric concentration of carbon dioxide ranged between 180ppm (parts per million) and 300ppm.  As we currently stand at 419ppm of carbon dioxide in the atmosphere, this is well beyond the considered maximum safe concentration of 350ppm according to Professor Rockstrom’s work on planetary boundaries and deep into the danger zone. Decarbonisation represents both a risk and an opportunity. We cannot offset our way out of climate change today. So how do we collectively achieve net-zero?

To tackle the issue, we must start by measuring one’s carbon footprint, set science-based reduction targets to reduce and avoid carbon emissions and, as a last resort having considered all options, we can turn to carbon offsets. All companies across all sectors and all countries must work toward further decarbonisation for the world to achieve the collective objective of net-zero by mid-century.

The two main elements of decarbonisation are reducing and removing emissions. Reducing emissions includes energy supply decarbonisation, like building renewable energy capacity and storage, energy demand reduction (meaning increasing the efficiency of energy use), and finally process transformation, which involves developing alternatives to non-energy-based emissions from chemistry and biology.

Some sectors will be easier to decarbonise than others. More investments and incentives are needed to tackle the decarbonisation in all sectors of the economy, like energy, utilities, and transportation. It must also tackle emissions in hard to abate sectors in the heavy industry, cement, steels and chemicals, and heavy-duty transport such as aviation or shipping. While there is uncertainty over the speed of the energy transition and the world still relies on fossil fuel for 83 per cent of its energy today, decarbonising power generation remains a top priority. The transition to a low-carbon emissions economic model is irreversible and all the solutions to achieve fully decarbonised energy production exist today. 

Carbon offsetting is part of the solution but must be the last step in the decarbonisation process. Today, the demand for carbon offsets far outstrips supply. Types of carbon offset include avoidance offsets, nature based offsets like forestry, oceans, soils and other natural processes, and finally mechanical removal offsets. Not all carbon offsets are born equal as there is a range of initiatives, prices points and quality of offsets.

Both nature based and technology based removals have challenges. As of today, there is not enough arable land to meet all the corporate net-zero pledges. While nature based solutions provide cheaper carbon offsets than technology based methods, they also take longer to sequester CO2 from the atmosphere. Meanwhile, mechanical removal requires high upfront capex and high renewable energy capacity. The estimated cost per ton of CO2e from mechanical removal is far greater than nature based solutions with prices ranging up to $1000 per ton CO2e versus forest based solutions ranging anywhere between $7-50 tCO2e. This represents a major hurdle to wider and faster adoption of technologies like Direct Air Capture. Further investment into those newer technologies is fundamental if we want to foster positive change.

Today several compliance markets and voluntary markets co-exist in a fragmented way. Global emissions covered by regulation, either carbon tax or Emissions Trading Systems (ETS), grew from five per cent in 2010 to 22% in 2021. The EU ETS, China ETS and the Regional Greenhouse Gas Initiative (RGGI) which includes 11 East Coast US states are some of the more prominent mandatory cap-and-trade programmes.

The intention behind mandatory carbon markets it to reinternalise the cost of negative externalities such as GHG emissions back into the cost of doing business. Over time, the expectation is for the cost of offsetting to grow and to incentivise companies to invest in transitioning their business to a lower carbon emission business model rather than pay for offsets. Companies not covered by mandatory offsets have seen shareholder pressure ramp up in recent years to make a commitment to net zero as well. This has led to the rapidly growing demand for voluntary carbon offsets registries like Verra or the American Carbon Registry (ACR). Last year, COP26 finally saw countries agree on a rulebook to establish a global carbon offset market.

The agenda to achieve rapid decarbonisation for net zero is a collective effort and will require incentives and investments into both mature and innovative solutions. COP27 will hopefully bring us closer to net zero by focusing on the implementation of decarbonisation solutions to take a step forward and bring about change.