As we move into 2022 consumer sentiment on climate action is running high and there is increasing pressure from the UNWTO and industry partners for travel companies to join in the climate cause. For many businesses carbon offsetting is a key element of their climate strategy, and with offset prices climbing, I’ve been receiving questions from travel companies looking for perspective.
With that in mind, I compiled this a snapshot of what’s going on with offset prices and how some adventure companies are thinking about their climate strategies in light of the new dynamics.
Carbon Offset Pricing in the Past
Recall that carbon offsets are a way for an individual or a company to compensate for their carbon emissions: the purchaser of a carbon offset pays someone else to not emit elsewhere. Carbon offsets include things like paying for the planting of new trees or restoring forests, supporting renewable energy projects like windfarms, or making clean cookstoves available.
A global supply of carbon offsets is sold to travel businesses and consumers through respected brokers like South Pole, Sustainable Travel International and many others. The vast majority of these offsets – almost 90 percent – come from nature-based solutions and energy related products.
For many years there have been more offsets available than there have been people wanting to buy them, and this surplus meant that offsets could be had for an average price of about $7 per ton to as little as $3 per ton [McKinsey]. For companies or individuals with lower volumes of emissions to offset, prices could be found in the range of $12 to $20 per ton.
A few companies I’ve talked to recently however, say they’re learning that the price of their offsets could increase by a factor of four of five in 2022. To put this in perspective, imagine you are a tour operator typically offsetting 20,000 tons of greenhouse gas emissions. Your bill in the past, with a contract for $7/ton, would have been $140,000. A four-fold increase in price, as some say they are now expecting, would bring that bill to $560,000.
What’s Influencing Carbon Offset Prices Now
What’s pushing prices higher now? Increasing demand. Back in June, 2021, a UCL Trove Research study predicted that carbon offset prices would ‘surge tenfold’ as the surplus of global offsets was eroded by more businesses adopting net zero targets. November, 2021 saw COP 26 negotiations result in clearer guidelines in Article 6 of the Paris Agreement, provoking even more activity in carbon markets.
A recent pricing analysis of carbon offsets published by BloombergNEF characterized the current and future market: carbon offset demand today is quantified at 127 million tons, with supply at 250 million tons. By 2050, analysts predict demand could reach at least 3.4 billion tons and even exceed 5 billion tons, while supply could reach 6.8 billion tons, noting that “an increasingly complex set of initiatives, frameworks, regulations and policies will set prices, which will in turn inform the total supply of carbon offsets in the market.” So basically – there are a lot of changes ahead, and the market is sure to be dynamic and unpredictable.
What Carbon Offset Price Dynamics Mean for Sustainable Travel Companies
The dramatic fluctuations in the global offset market has set some travel companies down a path of re-evaluation. The business leaders I’ve spoken with are considering more carefully the quality of the offsets they’ve typically invested in, the prominence of carbon offsets in their overall strategies, and their approach to purchasing.
When it comes to gauging offset quality, whether the projects funded through carbon offsets are actually achieving the goals they claim can be verified by standards such as Gold Standard and Verified Carbon Standard. Key factors considered when evaluating carbon offset quality are:
- Additionality: whether the project would have happened without the revenue received through the purchase of the offset)
- Uniqueness: this means that only one carbon offset is linked one ton of carbon dioxide equivalent emissions and is meant to guard against double-counting, which can happen if an offset is sold more than once
- Measurability: whether the emissions avoided or removed can be quantified with recognized, standard tools
- Permanence: this refers to the long term integrity of a carbon offset project and whether it can uphold its emissions avoidance or sequestration commitment over a set period of time, often 100 years
Another aspect to watch with offsets is ‘leakage’: this refers to situations in which the existence of the offset exacerbates an environmental or existing social problem. An example of this is when forests adjacent to those protected by offset revenues have the unintended effect of accelerating deforestation in unprotected areas.
Price reductions for conventional offsets can be realized when you pool your travel business’s emissions volume with others in the industry through ATTA’s carbon offset bulk purchase program, Neutral Together. George Favaloro, South Pole North America Head of Climate Solutions commented, “Rising carbon credit prices means that more carbon projects around the world are getting the financing they need to get off the ground, which we are delighted to see. This is particularly true for the more complex and expensive projects – the ones that could not get enough funding when carbon prices were low. At the same time, rising carbon prices means that our clients are looking to the most cost-effective strategies to manage their carbon footprint. It means they will be looking more closely at ways to reduce their own emissions, and gain more favorable pricing terms by buying carbon credits in bulk or investing in future carbon projects.”
With respect to offset quality, I’m seeing a new openness to climate strategies that focus more assertively on reductions and incorporating newer forms of carbon removal that deliver on quality goals. I believe we could be at the beginning of a migration from away from pure carbon emissions ledger balancing via low cost conventional offsets to portfolio approaches to climate action that deliver on revised impact goals.
I say this because recently I’ve spoken with a handful of business leaders who say they’re contemplating purchasing fewer offsets overall but focusing those purchases in areas where they have strong confidence when it comes to the factors of additionality, uniqueness, measurability and permanence. If maybe in the past they were a little unenthusiastic about some of their offset choices, they kept going simply because it was easy to do so. Now rising prices are forcing some strategic reconsideration, and they’re bringing in new approaches in order to have greater impact overall.
Climate researchers and advisers Robert Hogland and Eli Mitchell-Larson address this in a recent Greenbiz article titled “What lies beyond offsetting?”, observing that ”the offsetting logic also creates incentives to buy as cheap credits as possible, resulting in purchases that often lead to very little climate benefit” and suggesting that “focusing on global net-zero means taking an impact-first approach and asking, ‘Where is my contribution most needed?’ rather than, ‘How can we make an offset claim as cheaply as possible?’”
For some of the business leaders I’ve spoken with recently, higher offset prices mean they’ll be taking a budget-first approach and allocating funding to support a range of activities – maintaining some contribution to offsetting projects they have confidence in, for example, but letting the imperative to balance all their emissions in this way, fade.
This is where the carbon removal collective Tomorrow’s Air can help, as customized carbon removal with permanent storage plans are available for businesses based on a budget they set and work within from the beginning. ‘Gift of Air’ one-time purchases are also possible, allowing companies to add a carbon removal contribution onto every booking. Companies can also readily encourage their guests to join with them in the program with traveler plans starting at $10/ month.
Since 2020 the Oxford Principles for Net Zero Aligned Carbon Offsetting has encouraged this sort of evolution, encouraging offset purchasers to increase the portion of their offsets that come from carbon removals: “Users of offsets should increase the portion of their offsets that come from carbon removals…creating demand for carbon removal offsets today will send the necessary market signal to increase supply.”
Court Whelan, Chief Sustainability Officer at Natural Habitat Adventures, remarked, “I hope we see broader interest in quality, not just quantity of offsets, along with a more diversified approach to seeking carbon neutrality. As we think about what lies beyond carbon offsetting and carbon neutrality, I expect the importance of third-party verification systems will grow. Their role in auditing projects for things like additionality, uniqueness, and permanence will be more in the limelight. I also expect that as companies new to offsetting become more versed in the whole process, in some cases assuming the traditional roles of auditors themselves, projects will need to be able to convey clear evidence of their quality. I view investing in programs that help to de-carbonize one’s own operations, in addition to de-carbonizing the atmosphere through physical carbon removal programs like Tomorrow’s Air as valuable – as a type of risk mitigation, kind of like hedging your bets in any market or enterprise.”
Given the greater focus on impact, I also expect to see more businesses engaging their guests in the conversation around emissions reductions and what that looks like in practice for companies selling travel – whether it means offering fewer meals with meat or building in longer transit times in country to reduce emissions from flights – businesses will be making changes that customers will notice and care about.
Perhaps we’ll start to see the emerging practice of internal carbon pricing – where a company assigns an internal cost to activities that produce emissions – crop up in travel companies. Internal carbon pricing would influence everyday decision-making in travel companies, by financially capturing the consequences of those aspects of operations that drive emissions. Microsoft made headlines for adopting this approach in 2020 with its announcement of an “internal carbon tax” to cover all scope 1 and 2 emissions plus 3 travel emissions.
All in all, it seems that rising conventional offset prices are opening the door for a deeper look at climate strategies. If a company can no longer feasibly offset all its emissions as it did in the past with conventional offsets, the need to evolve and engage customers and partners in a new narrative naturally presents itself.
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