Is carbon neutral all it’s cracked up to be?

Sascha: [00:00:03] from equity markets. Media. This is the dive. I'm your host. Sascha Kelley, carbon neutral. It's becoming a common term in our vocabulary. And this morning I was curious about my own footprint so I jumped on carbon footprint dot com originally titled and I estimated what my output might be. I put in lots of details about my life, the fact I don't have a car, I work from home. I do fly a lot and it is loosely calculated that my personal carbon footprint is about 13.54 tonnes a year. That's two tonnes below the average Australian, but six tonnes over that of my counterparts in the European Union. The nice part though is that this website then suggested, strongly suggested to me that from the starting price of $232.56, I can offset that footprint. I could choose between UK tree planting, reforestation in Kenya or a range of projects in the Americas, and it's a pretty affordable price to assuage my guilt from my overseas trip and then in turn achieving carbon neutrality. It's kind of the way that big companies, governments and other organisations also signal that they're taking climate change seriously as well. They purchase offsets to achieve this status. But in the news lately, two cases, one in the United States and one in Europe, are challenging the meaning of this term and the way that companies are achieving it. It's Wednesday, the 14th of June, and today I want to know is carbon neutrality all it's cracked up to be, or is it another form of greenwashing? To talk about this today, I'm joined by my colleague and the co-founder of Equity Mates. It's Alec Renehan. And Alec, welcome to the dive. 

Alec: [00:01:57] Sascha. Good to be here. This is a hot topic in the equity markets community and I think just the investing community more broadly ESG, climate investing, sustainable investing and now carbon neutrality, all these terms are getting scrutinised at the moment. 

Sascha: [00:02:12] I know and it feels a bit like Pandora's box, but once you start opening it, you find more and more things that you maybe didn't want to know, but it's a great topic to dig into today. So let's start at the beginning. A number of notable companies use carbon offsets to achieve their climate goals. 

Alec: [00:02:30] That's right. Now, the starting point for this conversation is that no company is truly zero carbon. If you transport any physical goods, if you use computers, if you use electricity in general, then there are emissions associated with your business activities. So then the question becomes how do companies achieve carbon neutrality, And they do that by netting off any emissions with these carbon offsets for each tonne of carbon emitted, They buy a credit that offsets that emissions, making them neutral on the scales of the environment. The damage they do is offset with the good that they do. Now we're going to get more into the carbon market later in this episode, but all you need to know at this point is that carbon is big business. According to Morgan Stanley, the market for carbon offsets was $2 billion in 2020, and they expect that to grow to $250 billion by 2050. The biggest driver of this growth is companies making carbon neutral pledges and then they have to go out and buy these carbon credits to offset their emissions and achieve neutrality. And they don't just do it once they do it every year. So you can say that there's a real compounding effect as more and more companies join carbon neutral pledges. And it's some of the biggest companies in the world that are doing it. Starbucks plans to be carbon neutral by 2025. Apple announced plans to be carbon neutral by 2030, IKEA also by 2030. Amazon plans to be carbon neutral by 2040. But there are also plenty of companies today that have already achieved this carbon neutral status in Australia. National Australia Bank claims to be the country's first carbon neutral bank. Telstra is Australia's first carbon neutral telco. Cooper Energy is Australia's first carbon neutral domestic gas supplier. Didn't know we had any of those and they can achieve this neutrality despite their business operations still emitting Cuba. Energy is a domestic gas supplier. The National Australia Bank is still funding fossil fuel projects, So that's the nature of the carbon offset market. 

Sascha: [00:04:48] Yeah, to take it back to that individual example, I said at the beginning, I took an international trip this year, so this year my fee would be in the two hundreds. But next year if I. Don't do a trip. If I don't fly anywhere, it's going to be much cheaper. Both years, I can achieve carbon neutrality. 

Alec: [00:05:05] Exactly. Exactly. And if in five years you buy a coal mine and an offshore oil refinery, you could achieve carbon neutrality that year as well.

Sascha: [00:05:14] And drive around in my home line for doing an investment. Now let's get to the two cases that kind of brought this to our attention this week. There's one in the U.S. and one in Europe, and both are kind of challenging this practice. What's happening here?

Alec: [00:05:28] Yeah. So let's start with America and Delta Airlines. They're one of the major airlines in the U.S. I believe we flew them from Omaha to New York. 

Sascha: [00:05:37] Shout out to getting us. 

Alec: [00:05:39] Yes, shout out to Delta. So Delta's been on the front foot when it comes to setting climate goals. They set the goal to be net zero carbon neutral by 2050. And a key part of their strategy to achieve that goal has been buying carbon offsets. Now, a class action lawsuit has been filed in the United States against Delta, claiming that the airline misrepresented itself as a carbon neutral airline in marketing campaigns, which in turn encouraged customers to pay higher prices. The lawsuit alleges that the offset markets that Delta relied on are rife with inaccurate accounting and exaggerations of the climate benefit of those offsets, meaning that Delta has not actually been carbon neutral since it first promised to be in March 2020. Now, there's a quote from the lawsuit, quote, Nearly all offsets issued by the voluntary carbon offset market overpromise and under-deliver on their total carbon impact. So that's the lawsuit in the US. It's a class action challenging the validity of these offsets and in doing so, challenging what Delta was claiming about being carbon neutral. 

Sascha: [00:06:55] Okay. Let's move to the other case, which is in Europe, and that's with the airline KLM. 

Alec: [00:07:01] Yeah, very similar case. KLM, Royal Dutch Airlines. I'm not going to try and pronounce what KLM stands for. They had a advertising campaign fly responsibly and they were positioning themselves as the most environmentally responsible airline organisation in the Netherlands. Fossil Free Netherlands brought a lawsuit against them, arguing that those ad campaigns misled consumers about the airline's environmental credentials. 

Speaker 3: [00:07:31] We all have to fly every now and then. But next time, think about flying responsibly.

Alec: [00:07:37] Just two weeks ago, a judge in the Netherlands found that Fossil Free Netherlands did have standing to bring a lawsuit. So that's still playing out over in Europe. But you can see in the facts of both the US and the European case, they're similar. They're groups of people challenging these airlines claims about their environmental credentials. In Australia, we're also saying something a little bit similar. We're not saying an airline taken to court, but the Australia Institute in February 2023 has asked. The rebels, say Australia's consumer watchdog to investigate whether some of the claims around carbon neutrality and a government backed organisation climate active, that gives a trademark to organisations that are pursuing carbon neutrality. The Australia Institute of asked whether those campaigns are misleading and deceptive.

Sascha: [00:08:33] So, Alec. Three continents, three cases. But at the core of it kind of the same question, which is are carbon offsets misleading consumers? So I kind of wanted to dig into how the carbon offset market works, how these credits are actually traded and sold and certified. And when I Googled that in my research, a headline came up from May that said, The CEO of the biggest Carbon Credit certified to resign after claims offsets are worthless. So I feel like that's a good place to pick it up after the break. 

Audio Clip: [00:09:08] The idea that you can simply invest a little money and make your carbon footprint disappear. Sounds too good to be true. That's because it absolutely is. Study after study has indicated that most offsets available on the market don't reliably reduce emissions, and yet offsets are now the backbone of the environmental policies of many of the biggest polluters on the planet. So given that tonight, let's talk about carbon offsets, what they are, what they claim to do and how they may actually be making things even worse. 

Sascha: [00:09:36] Welcome back to the dive. And that clip you're just listening to then was actually John Oliver talking about this very subject on his show last year. I love John Oliver and it's so great when pop culture leads serious reporting. But Alec, for too long didn't watch, didn't listen, or my YouTube algorithm didn't serve me up that particular video. What are the issues that John Oliver is talking about that the voluntary carbon market is facing? 

Alec: [00:10:04] The central problem is that there's no minimum standard when it comes to this voluntary market. There's no government body or international organisation that says this is the minimum standard for your carbon offset projects. And so the world relies on third party auditors to perform due diligence and attest to the veracity of the information provided and also to measure how much carbon has been saved and how many credits that is worth. But Sascha, that is where one of the key conflicts come in, because these third party auditors have an incentive to create more credits and get more projects online because they get paid for every credit and for every project. One of the two big third party auditors, Vera, earns about $0.10 for every credit it certifies, and it approves tens of millions of credits each year. So you can see how this is perhaps a conflict of interest. And that conflict of interest manifests itself in some of the poor quality projects that we've seen. Joint reporting from The Guardian does that and source material looked at a class of projects around protecting forests from deforestation, essentially land, Holder says. I was going to cut these trees down, but instead I will leave these trees and I will get carbon credits for not cutting the trees down instead. Makes sense. But what this reporting found was that Vera were signing off on credits where forests were under no threat from deforestation at all, and also signing off on credits where deforestation actually increased. 

Sascha: [00:11:52] So people were collecting credits for trees that they had no intention of cutting down or just went ahead and did anyway. 

Alec: [00:12:00] Exactly. Now, companies that have bought credits that Vera have certified, not necessarily these credits, but just varied generally include Disney, United Airlines, Gucci, Shell, Air France, Samsung, the Liverpool Football Club, Ben and Jerry's, Ice Cream, Netflix and Chevron. Some of the biggest global companies are buying these voluntary credits and relying on these third party auditors who have an incentive to get more credits into the system. And some of the credits that they've signed off on have been found to be lacking. You can see how this voluntary system starts to have questions raised about it.

Sascha: [00:12:41] And also when the reporting said that Veron now sign off three out of every four carbon credits globally, that's a big problem. 

Alec: [00:12:51] Exactly. The reporting from these three organisation looked at about 95 million carbon credits that were signed off by Vera. That came from a few of their major forest projects, and they found that about 6% of the those 95 million carbon credits were real emissions reductions. Not ideal. 

Sascha: [00:13:13] No, that's really disheartening. So in the hope that we're going to find the silver lining of this story. Is there anything coming down the line to replace the carbon credits structure or improve the existing system?

Alec: [00:13:26] Yeah, I think there's plenty of silver linings here. We should be clear that the 6% were real emissions reductions were from these deforestation projects or were not going to De Forest. This area projects. It's not 6% of all carbon credits. There's a lot of much better carbon credits and the industry is already starting to reject those type of projects. We have this land we were going to chop down. The trees were not anymore. Gold standard. Vera's main competitor already refuses to issue credits from avoided deforestation, and most of the government markets are starting to move in that direction as well. This for me is a real. Don't throw the baby out with the bathwater situation. There are some poor quality offsets out there, but that doesn't mean the concept of offsets isn't important. If you can't get the business case up to build a wind farm or to install more solar panels or get like a grid scale battery to store renewable energy, the additional revenue you might get from these credits could make a marginal project viable. So some other alternatives. There's a trend towards just absolute reduction. So rather than rewarding companies and celebrating companies that have become carbon neutral by throwing money at the problem and buying offsets, instead, we should monitor, track and celebrate the companies that are doing the most to just reduce the absolute amount of emissions in their business. One of Delta Airlines biggest competitors, easyJet, announced that it was ending CO2 offsets and instead it was going to re-orientate its sustainability program around absolute emissions reduction, in particular sustainable fuels and more efficient planes. And what we should be mindful of, Sascha, is that greenwashing is in the sights of regulators. In late May, the European Parliament voted to ban claims of carbon neutrality. That's purely based on offsetting in the UK terms like carbon neutral and nature positive. Not a term that I've seen much. They're going to undergo greater scrutiny by the Advertising Standards Authority in the United States. The Securities and Exchange Commission is looking at greenwashing from an investing context. So greenwashing in business and finance is certainly front of mind for governments at the moment.

Sascha: [00:15:58] While we're waiting for regulators to crack down, what should we be thinking as consumers about claims like deltas or clams? 

Alec: [00:16:06] I think if you are concerned about this issue, you're mindful of greenwashing and you want to make sure that how you're spending reflects your values. I think it's a case of just looking beyond the carbon neutral headline and looking at how companies are achieving it. If they are working to reduce their total emissions year after year and are just offsetting the rest, and hopefully that rest gets smaller and smaller each year, that is great. That is a company taking real steps to reduce the total amount of emissions in the world. If a company is carbon neutral but they're not changing their operations at all, some might even be investing in more emissions producing activities, but instead they're just paying the offsets every year so they can claim it. Then it's just marketing spin. So I think it's about looking beyond the carbon neutral headline and saying what is actually driving that and if they're improving their operations. 

Sascha: [00:17:05] Well, Alec, I think if there's one thing I've learnt from today's episode, it's that I need to look at my own carbon footprint and maybe ask some questions of how much electricity, my own habits and how they're impacting the CO2 I'm putting out in the universe. But I think we're going to leave it there for today. A quick reminder, if you want to help us at the dive, the best thing you can do is send this episode to a friend. Start a conversation, get them intrigued. It really is the best way that a podcast like ours can grow. In the meantime, though, Alec, I'll talk to you on Friday. 

Alec: [00:17:35] Sounds good.