Carbon Credits and the Problem With Fossil Fuel Companies

The United Arab Emirates (UAE) says that low-carbon oil will play “a central role” in the energy transition. As a major oil producer, the country intends to make its oil “one of the cleanest” in the world.

Its COP28 president-designate, Sultan Al Jaber, recently reiterated these views. Al Jaber, who is also the head of state-oil giant ADNOC and is the country’s minister for industry and technology, said, “As long as the world still uses hydrocarbons, we must ensure they are the least carbon intensive possible.”

While the UAE is investing billions in renewables, it is also investing billions to boost oil and gas production capacity.

New Projects Set to Drive Up Greenhouse Gas Emissions

Over the years, fossil fuel producers have made many claims to address their role in climate change. But, little has changed.

Australia’s new government, for example, committed to tougher action on the climate when it took office in June last year. The country was the world’s biggest polluter regarding coal use in 2021.

Meanwhile, Australia’s updated NDC fails to mention that the country has over 100 new gas and coal projects in development. The emissions represent around 1.7 billion tonnes of total emissions annually.

Similarly, Japan continues to add new coal capacity despite pledging to phase out 90% of its coal power plants. The world’s fifth-highest emitter of carbon dioxide (CO2) also plans to utilise “clean coal” to decarbonise electricity production.

What Are Carbon Credits?

Facing pressure to clean up their own greenhouse gas emissions, oil and gas companies increasingly try to position their products as clean. To do so, they have used various controversial methods, including powering drilling operations with renewable energy.

Such projects include solar parks, wind farms, waste-to-energy facilities, reforestation and conservation initiatives.

Carbon Offsets Allow Polluters to Profit from Climate Change

Carbon offsets have enabled some of the biggest fossil fuel companies to sell their products by labelling them as carbon neutral.

These include national players such as Australia’s AGL, Ampol and Origin Energy. And they include multinationals such as Royal Dutch Shell, BP and Total, which have started to sell “carbon-neutral LNG”.

Furthermore, in 2021, Occidental Petroleum sold the world’s first shipment of “100% carbon-neutral oil” to India’s Reliance Industries. Over its life cycle, the 2 million-barrel cargo was destined to produce more than a million tonnes of CO2.

But, the American driller claimed it offset that impact by purchasing carbon credits under the UN-sponsored program CORSIA. This global offsetting scheme has faced accusations of allowing fraudulent and double-counted offsets.

Fossil Fuel Sector Leans on Carbon Credits

With no unified standards or regulatory oversight, offsetting fossil fuel extraction with carbon credits remains highly questionable.

“Companies think they can continue piling emissions into the world, and cover their tracks with carbon offsets,” Australian mining magnate Andrew Forrest told The Guardian.

Several investigations have found that carbon credits are built on a flawed system and lack integrity. These include a study by The Guardian and another by Australian National University.

Moreover, companies that purchase carbon credits through voluntary carbon markets are not required to disclose the details of their purchases. Therefore, no one knows what these offsets cost, their origins or who paid for them.

Yet, oil and gas firms increasingly rely on carbon credits to “green” their processes. In the first nine months of 2021, hydrocarbon shipments accounted for 5% – or about 4.6 million – of all issued carbon credits. According to Trove Research, this was up from 1.2 million offsets in 2020. Shell’s carbon-neutral LNG deals alone have used a third of the total offsets coupled with hydrocarbons since 2015.

Carbon Credit Prices Represent a Fraction of Fossil Fuel Profits

Additionally, the purchase of carbon credits by fossil fuel companies takes less effort than changing their business models.

For example, in Australia, gas companies using carbon credits to claim emissions reductions can pay as little as 0.05% to 0.09% of their annual profits.

Occidental also reportedly paid a negligible amount to offset the emissions from its oil shipment to India in 2021. A Reuters investigation found that Occidental paid about USD 1.3 million for the credits, or about 65 cents per barrel. At the time, oil was selling for more than USD 60 per barrel.

Fossil-fuel-related Carbon Dioxide Emissions Hit New High

Overall, carbon credit schemes have not reduced emissions. In Australia, industrial emissions have increased by about 7% since the inception of the country’s carbon-neutral certification program.

In India, emissions from fossil-fuel combustion have increased by about 31.3% between 2010 and 2020. This is despite the fact that India has been a significant exporter of carbon credits. Between 2010 and 2022, the country accounted for 17% of the global carbon credit supply.

Globally, CO2 emissions from fossil fuels increased by 1% in 2022, hitting a new record high of 36.6 billion tonnes.

Restricting the Use of Carbon Credits

Carbon credits can be helpful for hard-to-abate sectors, such as cement and fertilisers, to limit their carbon footprint. The problem is that the mechanism is extending the life of fossil fuel plants. As such, it is stalling the energy transition.

CO2 emissions from fossil fuels have risen to record highs in 2022, making the year the sixth-warmest on record since 1880.

Carbon credits should be off-limits or severely restricted for fossil-fuel companies to achieve actual emissions reductions. The Greens political party is pushing for this in Australia.

Instead of covering their tracks with carbon offsets, oil and gas companies need to invest more in clean energy. Most importantly, they must do this while moving away from the fossil-fuel extraction model.