Investors in carbon offsets are sounding the alarm as millions of tainted units look set to enter the market.
(Bloomberg) — Investors in carbon offsets are sounding the alarm as millions of tainted units look set to enter the market.
A plan by a Belarusian trade group to sell 2 million Russian carbon credits from a defunct United Nations program has been slammed by climate experts and trading veterans. The worry now is that such offsets, known as emissions reduction units (ERUs), will end up contaminating the market and ultimately find a buyer.
Pablo Fernandez, chief executive officer of Ecosecurities, a Switzerland-based project developer and investor, says he views the Belarus project as “surreal,” and warns that the development can “only be detrimental to the market.”
Rich Gilmore, CEO of investment manager Carbon Growth Partners in Melbourne, says there’s “not a single country or company of any repute that would use” such units for offsetting purposes. ERUs of this kind are “obsolete and largely valueless,” he said.
The ERUs will be sold by the Belarus African Foreign Trade Association (BAFTA), which was created last year, according to Vitaliy Zholnerovich, deputy head of the investor servicing department at the Belarus National Agency of Investment and Privatization. The program feeds into the unregulated carbon offsets market, which BloombergNEF estimates could reach $1 trillion within 15 years.
“These credits have really low integrity,” said Lambert Schneider, a carbon markets expert and research coordinator at the Öko-Institut, an environmental research nonprofit in Germany. It’s “worrying” to see them in circulation, because the “potential for abusing these units is really large,” he said.
A total of roughly 2.5 million ERUs were retired last year, 2.24 million of which were in Swiss accounts, according to an analysis by Bloomberg News of data filed to the UN Framework Convention on Climate Change. When credits are retired, it’s usually because they’re being used to claim that physical emissions have been offset.
The voluntary retirement of carbon credits from the Swiss Emissions Trading registry by private entities has “no endorsement” by the Swiss government, Robin Poëll, a spokesman for the Swiss Federal Office for the Environment, which oversees the registry, said by email. And ERUs can’t be used to comply with national climate rules, he said.
Poëll said the office can’t comment on the specific ERUs, citing confidentiality clauses.
Dutch trader ACT Commodities Group BV and ACT Financial Solutions, which are both units of SMS Holding BV, retired 2.24 million ERUs last year from their accounts on the Swiss Emissions Trading Registry, ACT told Bloomberg. The firms stopped trading the units in 2021 and then “destroyed” about 1.5 million of those ERUs last year, after learning of their “low environmental credibility,” said Esmée Trimbos, global head of marketing at ACT Commodities.
The commodities trader says it has since worked with clients to phase out contracts, or to swap the units for higher quality alternatives. That said, 750,000 ERUs were retired last year on behalf of a client, ostensibly for use as offsets, Trimbos said by email.
Switzerland became a hub for ERUs in 2019, after a sudden influx of such units from the UK. The bulk – 75.2 million – went onto accounts at Vitol SA, the world’s largest independent commodity trader. There are still 75.2 million ERUs — equivalent to about 9% of all such units ever issued, or twice Switzerland’s annual CO2 emissions — in Swiss accounts, according to UNFCCC filings.
“Vitol has regarded ERUs as having no value for a decade and ERUs held by the company were written down to zero many years ago,” a spokesperson for the company said by email. Vitol doesn’t intend to trade or retire the ERUs it holds, the person said, adding that the transfer of the ERUs by Vitol from the UK to the Swiss registry in 2019 was an administrative process required due to Brexit.
Buyers would be wise to conduct thorough checks on where the credits come from and their quality, said Levi McAllister, partner at Morgan Lewis, a global law firm. For those looking to hold and trade, rather than immediately use and retire the units, the risk is elevated.
“In the absence of standards and regulatory oversight, there is risk in this market and someone is going to hold it,” McAllister said. “The valuation of these things is very difficult because they can turn overnight,” he said.
Belarusian officials say the 2 million Russian ERUs set to enter the market were generated between 2008 and 2012 from a Siberian forestry program in the old UN Joint Implementation carbon market set up under the Kyoto Protocol, a global climate pact that entered into force in 2005. The ERUs are owned by a Russian company and have never traded, a Belarusian official said. Belarus can obtain a further 100 million units, the official said.
The goal had been to list the Russian ERUs on a new exchange in Zimbabwe. But Kwanele Hlabangana, chairman of the Africa Voluntary Carbon Credits Market (Private) Ltd. that owns the exchange, has said it will only host African credits.
Despite that hurdle, Zholnerovich says BAFTA’s “pledge stands” to trade the 2 million Russian ERUs.
Researchers at the Stockholm Environment Institute have found that about 75% of offsets in the market targeted by BAFTA are likely to have been useless, with the bulk of those stemming from Russia and Ukraine. Worse still, the system may have enabled about 600 million tons in extra carbon dioxide equivalent emissions.
According to Schneider, a co-author of the study, the program is “maybe the worst mechanism that ever existed in terms of integrity.”
–With assistance from Ray Ndlovu and Antony Sguazzin.
(Updates paragraphs 14 and 15 with comments from Morgan Lewis)
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