Buddy, can you spare a credit?
As governments and industries increase their efforts to reduce greenhouse gas emissions, there is a rapidly growing demand for carbon credits by companies and individuals seeking to offset the carbon emissions they can’t eliminate on their own. Despite the predicted demand shown in Fig. 1, there are concerns that challenges currently existing in the Voluntary Carbon Market (VCM) will restrict the availability of such credits in the near term. This year’s editorial addresses some of the challenges that may limit our industry’s access to the credits needed to offset company emission obligations.
CREDIT QUALITY
For the VCM to support this growing demand, it must provide quality carbon credits accurately, transparently, and reliably to potential buyers. There is no single governing body to ensure the quality of carbon credits. Instead, a growing number of non-profit registries, such as Verra, Gold Standard, American Carbon, and BCarbon, have established strict protocols to manage projects and transactions that take place, using ISO (International Organization for Standardization) requirements established for greenhouse gases. This, however, may soon change, as the Commodity Futures Trading Commission just announced at COP28 that the U.S. will propose its first federal guidelines for voluntary carbon credit derivatives to bring order to a market of offset of emissions that they currently describe as the “wild west.”
That said, the existing process for generating credits is well-established (Fig. 2) and includes the use of third-party Project Validators, Operation Verifiers, and Process Authenticators to help ensure the credibility and quality of carbon credits generated within each project they manage. Validators first confirm that the mitigation activities planned within a proposed project would not have taken place in the absence of the incentive created by the carbon credits (additionality). Further, they validate that any CO2 removed does not re-enter the atmosphere in a short amount of time (permanence).
Verifiers then confirm that the mitigating operations were conducted and successful in removing the carbon, as planned. Finally, authentication consists of an intensive process in which a carbon reduction, removal or avoidance project is rigorously evaluated for its eligibility to mint carbon credits and its allowance for inclusion in a carbon credit registry. This involves scrutiny of key project documents, including validation, verification, monitoring, and project design.
As noted by Capturiant, a leading Houston-based environmental asset authenticator, registry and exchange, “Authentication confirms transparency and accountability in the market, instilling confidence in buyers and investors. In addition, it sets a high bar for project developers and verification and validation bodies, thus reinforcing the credibility of the carbon market. To be effective, authentication for environmental assets must be treated with the same level of due-diligence requirements of a securities offering, where background checks, provenance, sponsors, and financial criteria are of utmost importance.”
NOT ALL OFFSET CREDITS ARE CREATED EQUAL
Voluntary Carbon credits are of two types, Nature-Based and Technology-based credits. Nature-based solutions often rely on broad averages and assumptions rather than direct measurements of carbon, making it difficult to ascertain the actual net emissions of a project. Credit projects, based on technology and engineering expertise, present a tangible, verifiable, and often more impactful alternative. As the largest source of emissions, the energy sector is the natural place to seek out the largest-impact projects. For instance, projects capturing vented and flared gases from oil wells not only prevent emissions but are scalable and leverage existing technology, making them a promising path forward. Others, such as direct air capture (DAC) and CCUS technologies, offer a measurable and permanent solution to the carbon problem. In the future, the benefits of technology credits will undoubtably become the dominant source of offset credits. And frankly, they are required to meet the expected demand.
While there is strong growth in technology-based projects, the market for nature-based projects was shaken in January 2023, when a report in The Guardian suggested that “more than 90% of rainforest carbon offsets by Verra are worthless.” This news was a significant blow to the market’s confidence in nature-based credits, and the CEO of Verra resigned a few months afterward. Since then, Verra and others have taken steps to increase their diligence to rebuild the confidence in nature-based projects, which remain an important segment of the Voluntary Carbon Market. So, let us stay focused on the positive changes.
THE MONUMENTAL LEGACY OF UNPLUGGED AND ABANDONED WELLS
A hot discussion item in 2023 is the reduction of methane through the plugging of orphaned and abandoned wells, which are defined by the EPA as “wellbores with no recent production, and not plugged.” They include wells that are considered inactive, temporarily abandoned, shut-in, dormant and idle. A key challenge in determining the carbon credits associated with plugging abandoned wells is estimating the volume of carbon emissions that are being permanently sequestered.
As carbon credit protocols were initially developed for deforestation projects, many of these documents lacked the necessary guidance for estimating the volumes of methane to be permanently removed from the environment during such oil and gas operations. Even today, there is not a clear resolution of this issue amongst the leading carbon registries. Some rely on extrapolating the rate of methane leaks measured in the field, and others use basic decline curve estimates for various periods of years.
To me, the answer is to simply utilize the tried-and-true engineering processes existing within the certified reserve reporting forming the basis of reserve determinations accepted by the SEC for audits, banks for loans and corporations during merger and divestiture transactions. It seems logical that properly certified volumes of PUD reserves, which are not to be developed in the future, should be accepted as the volumes of natural gas that will be reduced by P&A operations, where the availability of historical data allows.
EXTERNAL PRESSURES
The Carbon Border Adjustment Mechanism (CBAM) is the EU’s tool to place a fair price on carbon emitted during the production of carbon-intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries. This is the world's first system to impose CO2 emissions tariffs on imported steel, cement and other goods, as it tries to stop more polluting foreign products from undermining its green transition. By 2026, CBAM will phase out the allocation of free allowances under the EU Emissions Trading System (ETS) to support the decarbonization of EU industry.
There is significant concern that the obligation to buy certificates poses an unfair financial burden for companies from regions where emission reduction costs are high, such as Southeast Asia. There is also concern that CBAM is establishing a tariff procedure that can be duplicated easily by countries around the world. Expanding the use of such tariffs will add additional demand pressures to the VCM.
CONCLUSION
To meet the growing demand for voluntary carbon credits, it is critical that consumers have high confidence in the quality of credits that are being purchased to meet their emission reduction obligations. To ensure the quality of carbon credits, it is imperative that the Validation, Verification, and Authentication processes also motivate companies to perform the operations required to capture credits and to do so at a pricing structure that entices buyers to acquire them.
For credits associated with oil & gas operations, the protocols should not try to re-create the wheel in determining reserve volumes and incorporate engineering standards that have been in place for decades. I believe that existing reserve standards should be expanded to include carbon credit determination as a regular part of their reporting. Finally, whenever the government gets involved, things will change. Sometimes, when things change, they initially are less efficient. Any loss of efficiency in the VCM will certainly impact credit supply and, by the end of 2024, will there be more than a few companies with their hands out and asking if anyone can spare a credit?
- Applying ultra-deep LWD resistivity technology successfully in a SAGD operation (May 2019)
- Adoption of wireless intelligent completions advances (May 2019)
- Majors double down as takeaway crunch eases (April 2019)
- What’s new in well logging and formation evaluation (April 2019)
- Qualification of a 20,000-psi subsea BOP: A collaborative approach (February 2019)
- ConocoPhillips’ Greg Leveille sees rapid trajectory of technical advancement continuing (February 2019)
