Carbon-Credit Surplus Could Soon Turn to Shortage

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Hundreds of companies plan to achieve their climate goals using carbon credits to offset the emissions they can’t eliminate on their own. Soon there might not be enough of the credits to go around.

Despite record demand for carbon credits last year, supply of new offsets has still outpaced demand. That has created a surplus that has has kept most carbon credits cheap.

The surplus could soon turn to shortage as businesses, acting to meet their climate pledges, boost demand. That will make it harder and more expensive for companies to claim to be offsetting their emissions. Demand for carbon credits could also run up against other important uses for land, such as farming.

Carbon credits are typically issued by projects that preserve forests, which absorb greenhouse gases, or by renewable energy projects that replace fossil fuels. Each credit represents the reduction or removal of one ton of carbon dioxide from the atmosphere. These credits are part of the so-called voluntary carbon markets. There are mandatory markets in places such as Europe and California that operate differently.

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In 2020, nearly 900 U.S. companies produced more than 9 billion tons of carbon dioxide, according to CDP, a not-for-profit that surveys businesses’ environmental goals.

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More than 600 of those 900 U.S. companies have targets to shrink their carbon footprints over the next three decades or less, according to CDP’s data.

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If those companies tried to offset all of their emissions with carbon credits, they would wipe out the surplus of credits built up over years in roughly four months.

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Credits from projects that prevent deforestation or plant trees along with other agricultural and land-based carbon-mitigation practices make up nearly 50% of the available supply, according to the Journal’s analysis of the University of California Berkeley’s carbon-credit database. These projects are costly and complicated. They often require preserving or developing vast tracts of land and protecting them for an average 30 to 70 years to absorb enough carbon dioxide to generate a steady supply of credits.

One risk is forest fires, which can wipe out the trees that were supposed to hold carbon. Another is the demand for land, which can run up against other uses such as agriculture, according to a recent study by National University of Singapore’s Centre for Nature-based Climate Solutions.

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Companies are investing to cover their own demand. In July oil producer and trader Shell PLC invested $40 million for a minority equity stake in a Brazilian carbon-credit developer focused on forestry projects, the company recently announced.

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Shell plans to spend about $456 million on nature-based projects that protect or restore forests, grasslands and wetlands in the coming years and aims to offset 120 million tons of carbon annually by 2030, according to the firm’s recent sustainability report. That is a fraction of the 675.6 million tons of carbon dioxide the company emitted in the 12 months that ended May 31, according to MSCI.

That means Shell faces a choice between producing less fossil fuel and buying far more offsets than it had planned. Shell, the second-biggest buyer of offsets identified by the Journal, says it will wean itself off offsets.

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