A loophole in the UK Emissions Trading System (ETS), designed to reduce planet-warming emissions, allows companies to profit millions of dollars from unused carbon credits after closing factories, leading to concerns about the misuse of the government scheme. 

Notably, the closure of a fertilizer plant by US firm CF Industries in Cheshire resulted in a windfall of £32 million (over US$39M) from the sale of carbon credits. Several other companies, including Mitsubishi Chemical and Cemex, have also benefited from the said “loophole”, triggering calls for immediate regulatory changes.

The Controversy Surrounding UK ETS

Under the UK government carbon trading scheme, firms in the heavy industry are given a free allocation of emissions. This is to prevent UK businesses from being disadvantaged compared to their foreign peers operating in nations with weak climate policies. 

Same as the EU ETS, companies in the UK must buy credits if their carbon emissions surpass their allocation. If they have unused or excess credits, they can sell those in carbon markets at the end of the year. The scheme is considered as fundamental to the UK’s net zero strategy. 

Greenpeace’s Unearthed investigated the UK ETS. Their investigation found that the scheme allocated free carbon credits to companies that closed plants, thereby reducing their emissions. 

There’s no time limit as to when the companies can sell the credits. That means they can wait when carbon prices are high to sell the credits and earn profits from it. The price surged to £100/tonne last year.    

Unearthed particularly discovered that US fertilizer giant CF Industries received 630,000 carbon credits from shutting down two UK factories. The company first closed its plant in Ince last year, causing 350 job losses. 

• The unused carbon credits gave CF Industries an income of £32 million by selling those credits under the UK ETS. The total worth of the credits stand at £49M, using the average UK carbon price from 2022 of £78/tonne.

Another company, Mitsubishi Chemical, has also shut down one of its plants in Billingham, Teesside this 2023. This caused over 200 people to lose their jobs. 

Production at one of the world’s biggest chemical plants stopped, causing a significant drop in the company’s emissions. The chemical plant emitted 182,000 tonnes of carbon in 2021, which dropped to only 6,000 in 2022 due to the closure. This leaves Mitsubishi with 155,000 free carbon allowances, which is worth about £12 million. 

The investigation also found that the UK Government has no way to recall the credits once they have been allocated.  

The issue has raised concerns among environmental campaigners about the prioritization of financial gains over environmental and social responsibilities. 

• RELATED: Inside Carbon Markets: Problems, Causes, and Potential Solutions

Calls for Regulatory Changes

With the growing outcry, policymakers called for an urgent solution to close the loophole in the UK carbon scheme. This loophole gives companies that reduce emissions by closing plants the opportunity to earn millions from trading carbon credits.

Labour MP Alex Cunningham, in particular, emphasized the need to prevent companies from capitalizing on emissions reductions at the expense of local jobs and communities. 

• The questionable practice has sparked debates about the effectiveness of market-based mechanisms in curbing emissions. 

According to a carbon market expert at Carbon Market Watch, under the current UK ETS rules, a factory that shuts down on January 2nd will get free emissions allowances for the entire year. The government can’t get those credits back in any way. 

Remarking on this scheme, the expert further noted that allocating carbon credits to ghost plants “doesn’t serve climate goals or any economic purpose.”

As per Unearthed, the UK government is currently reviewing its free carbon allowance rules. However, any proposed changes to the rules will be accommodated by 2026. 

Whenever a firm stops operations or leaves the country, their carbon allowances won’t be distributed in the next year.  

For the proponents of the carbon trading scheme, they argued that it helps the country in meeting its ambitious climate goals. It was able to cut emissions by over 48% since 1990, quicker than any other G7 nation. 

A spokesman for the Department for Energy Security and Net Zero commented that:

“As previously announced, we are reviewing free allocation rules to make the system as robust as it can be while continuing to support UK businesses through the transition to net zero.”

In theory, carbon credit markets are designed to incentivize initiatives that reduce harmful emissions. Each credit represents a tonne of removed or avoided emissions. 

While there are some issues surrounding the validity and quality of the credits in carbon markets, studies have shown that they helped major companies cut emissions. High quality credits meet a set of criteria, validating their emission reduction claims. 

• READ MORE: How Do Carbon Credits Reduce Emissions?

The UK’s emissions trading system has come under scrutiny as companies profit from the closure of factories and the resulting unused carbon credits. The controversy has led to demands for immediate regulatory amendments to prevent the misuse of the government carbon credit scheme meant to help achieve net zero emissions.

Carbon credit prices are projected to increase dramatically as more lofty climate goals are made and achieved, according to a report published by Bloomberg with support from Carbon Growth Partners.

The report “Investing in Carbon Markets: Cleared for Take-Off” underlines the importance of carbon credits in reaching net zero emissions. It also highlights the need to invest in the market with growing demand and close the emissions gap. 

Closing the Emissions Gap

In 2023, the carbon market faced significant challenges. Yet, a surge in corporate demand, alongside stricter carbon credit generation rules, will push the market from oversupply to scarcity. In effect, this will drive carbon prices upward, particularly for nature-based credits, at over $55 per tonne of carbon dioxide in voluntary carbon markets.

The significance of carbon credits as a pivotal tool in bridging the emissions gap is underscored by a whopping 350% increase in annual retirements since 2016.

Carbon Credit Retirements by Project Type (tCO2e)

Substantial further growth in offsetting efforts is necessary to meet the target of limiting global warming to 1.5°C. This calls for total emission reductions of 150 billion tonnes of CO2 equivalent by 2030, 45% below 2019 levels. 

The report also said that the investment needed in renewable energy will be over $44 trillion by 2030.

• RELATED: Global Renewable Energy to Break Records in 2023, IEA Says
  

However, several challenges, including higher borrowing costs, competition for limited capital, and economic slowdowns, may lead to a scaling back or deferral of investments in internal decarbonization by companies. This drives a significant surge in corporate demand for carbon credits as a supplementary strategy throughout the decade. 

Many corporations are intensifying their emission reduction commitments, with 6,323 entities taking action under the Science-Based Targets Initiative. Together, they’re emitting around 32 billion tonnes of greenhouse gas each year, involving Scope 1, 2, and 3 emissions. 

Collectively, these climate pledges suggest a substantial potential demand for carbon credits, even with conservative action scenarios. There’s also a possibility of annual demand for credits reaching 6x the total annual supply from existing and pipeline projects if businesses with an approved SBTi target opt to offset 20% of their emissions. 

Moreover, given the sensitivity of carbon pricing, a moderate increase in corporate climate goals and action would push prices up.  

New Driver of Demand for Carbon Credits

A burgeoning demand for carbon credits is coming from a new and notable source – investors who recognize the potential of the expanding carbon market. 

Though institutional investor involvement has been limited so far, an increasing interest is evident. Many investors are starting to see the opportunity to generate financial returns while supporting climate solutions. 

Recognizing the prospective increase in carbon prices due to government and business commitments to carbon emission reduction, major players such as Citi Group and JP Morgan have committed substantial sums to carbon credits. 

Citi Group, in particular, emphasizes the enduring nature of the market, claiming that it is “here to stay”. Two months later, JP Morgan revealed its $200 million investment in carbon removal credits to decarbonize operations. 

• RELATED: Citibank Aims to Hit Net Zero Emissions with Carbon Credits

Similarly, State Street also announced its pioneering role in offering carbon asset fund administration and depository services. This will help facilitate the integration of carbon-related assets such as voluntary carbon credits into investment portfolios. 

Notably, one of the largest asset management companies in the world found out that as an asset class, carbon assets can improve portfolio diversification and efficiency.

Other institutional investors, including Temasek, AXA, CPP Investments, and TPG, have also made significant investments in various carbon-related ventures. The last three companies opted to fund forest protection projects, which generate carbon credits in return. 

Their move indicates a growing trend towards using carbon markets for diversified financial returns and climate impact mitigation. 

• READ MORE: Stafford Capital’s Forest Carbon Credit Fund Secures $242 Million

Bloomberg’s latest report, supported by Carbon Growth Partners, highlights the indispensable role of carbon credits in combating climate change, drawing attention to the increasing participation of institutional investors. This dynamic market shift underscores the pivotal role of carbon credits in closing the emissions gap and achieving climate targets.

AirCarbon Exchange (ACX) revealed that its exchange and clearing house in Abu Dhabi Global Market (ADGM), became live. The carbon exchange also announced that key trades have already started on their platform, expected to be a rapidly expanding market for voluntary carbon credit trading. 

Singapore-based ACX is a digital exchange seeking to speed up the world’s journey to net zero which uses blockchain technology to securitize carbon credits. These credits are certificates representing certain carbon emission reductions achieved by an initiative or project.  

The Pioneering Move in Carbon Credit Regulation

Emissions trading schemes in carbon markets are valuable instruments to reduce greenhouse gas emissions. In the voluntary carbon markets (VCM), carbon credits are called carbon offsets, demand for which is projected to skyrocket.

In compliance carbon markets, the credits are allowances or cap on the amount of carbon companies can emit. When they exceed the emissions cap, they can buy carbon credits from others with surplus or unused allowances. 

In February last year, Singapore-based ACX worked with the ADGM to establish the world’s first regulated carbon credits trading exchange in the emirate’s capital. ADGM will regulate the credits and the offsets as emission instruments while also issuing licenses for exchange platforms to work both as spot and derivative markets. 

Abu Dhabi’s sovereign wealth fund, Mubadala, acquired a 20% stake in ACX in November 2022. This move is part of the fund’s economic diversification and commitment to responsible investing. 

• RELATED: Abu Dhabi Wealth Fund Mubadala Acquires 20% Stake in ACX

In the same year, the ADGM made history by becoming the first jurisdiction to regulate voluntary credits as financial instruments. This milestone was facilitated through the Environmental Instrument classification, which established a regulatory framework for licensing exchanges and clearing houses.

Following that groundbreaking step, ACX Abu Dhabi became the first entity to be licensed under ADGM’s framework. The exchange earned the recognition as the world’s first regulated Recognized Investment Exchange and Recognized Clearing House.

Setting the Stage for Carbon Credit Trading 

The regulatory licenses gained by ACX significantly bolstered trust, security, and investor protection within the carbon credit trading space. By mandating fair trading practices, real-time market surveillance, and strict adherence to regulatory standards, ACX ensured heightened market integrity, transparency, and efficient price discovery.

With these in place, ACX successfully laid the groundwork for enabling VCM participants to trade under a robust regulatory framework.

• RELATED: ACX Inks Deal for First-Ever LED Carbon Credits Auction
  

Asserting the significance of this historic achievement, Arvind Ramamurthy, Chief of Market Development at ADGM noted that: 

“As we find ourselves in a critical time with the development of global carbon markets, this step marks a momentous milestone in the journey towards a thriving market for voluntary carbon markets.”

The inaugural carbon credit trade on the fully regulated carbon trading platform occurred through a collaboration between First Abu Dhabi Bank (FAB) and Helix Climate. 

FAB is UAE’s largest bank whereas Helix Climate simplifies the process of trading, settlement, valuation and retirement of carbon credits in the VCM. Their involvement underscores the importance of this remarkable evolution in the carbon market landscape.

Leading the Way to Market Integrity and Climate Action

Expanding its offerings, ACX Abu Dhabi announced the successful execution of the first trade on its Carbon Market Board (CMB). It is an advanced electronic trading platform that enables participants to carry out and finalize over-the-counter transactions. 

The significant trade was in collaboration with South Pole, a renowned global leader in climate project development and solutions provision. The carbon developer’s Executive Director, Abderrahman Kasmi, emphasized the pivotal role of ACX in fortifying the integrity of carbon markets.

ACX’s commitment to innovation in this sector was recently acknowledged by Environmental Finance. It awarded ACX Abu Dhabi the prestigious title of the best carbon exchange of 2023 for the third consecutive year.

Meanwhile, ADGM’s progressive ecosystem allows businesses and investors to voluntarily buy verified carbon credits, signifying testament towards climate action. 

• READ MORE: Asset Management Firm to Build $250M Carbon Fund in ADGM

Partnering with ACX is part of the United Arab Emirate’s net zero strategies. It’s also in preparation for hosting the upcoming climate change conference, COP28, in Dubai. 

The UAE leads the process for all COP28 parties to come up with a clear roadmap to accelerate progress to inclusive climate action by employing a pragmatic global energy transition and a “leave no one behind” approach. The COP28 Action Agenda provides a practical plan of action to turn the Paris Agreement objectives into reality.

With the adoption of advanced technology and a robust regulatory framework, ACX could help facilitate transparent and secure carbon credit transactions, fostering trust and integrity within the burgeoning carbon market landscape.

Occidental Petroleum, a leader in carbon capture and storage (CCS) technologies, has quietly abandoned its largest CCS plant, the Century, as per Bloomberg report. The technology worked, but economic concerns caused the plant to underperform at no more than a third of its capacity, leading to Occidental’s eventual divestment. 

The oil giant sold the Century last year only for a fraction of the cost it spent on constructing it. Today, Oxy is building a landmark carbon capture plant in Texas called Stratos. 

Oxy’s Failed CCS Venture 

Stratos is the second big bet of the oil major on CCS technology to manage carbon emissions. Century, built in 2010, is located 100 miles away from Stratos. It was designed to be the largest carbon capture plant, accounting for over 20% of global CCS capacity. 

While both plants are categorized as CCS, they use different carbon capture technologies. Stratos is using Direct Air Capture (DAC) while Century is pulling carbon from a specific source of emissions. 

Century was also built into a natural gas processing plant to suck in the CO2 it spews before it escapes into the air. This carbon capture process is cheaper, uses simpler tech and is more established than the DAC used in Stratos. 

• Though Oxy benefited from the direct application of Century, with the captured CO2 used by the oil firm in producing more oil, the older CCS plant failed to deliver expected results.   

As per Bloomberg investigation, Century has never worked at over ⅓ of its carbon capture capacity since it started working 13 years ago. The carbon capture technology successfully worked but limited gas supply is the biggest challenge. 

Century had two engines capable of capturing CO2, but only one was operational, never functioning beyond half its capacity. One engine can capture 5 million tons of carbon while the other can catch over 3 million tons. Satellite data show that cooling towers on one engine don’t function, suggesting non-operation.

After a decade of running the project, Oxy quietly sold the struggling asset in January 2022 for about $200 million. The oil major had invested more than 4x that amount in building the plant. An operator at Century noted that they don’t have enough gas to run the plant.

Thus, the company decided to sell it off to Mitchell Group. Despite the sale, Occidental claims to continue using all the CO2 from the old carbon capture plant.  

Century’s under delivery raises concerns about the viability of large-scale CCS projects. Can they be economically sustainable? 

• RELATED: Is the Money and Attention Given to CCS Worth It? An Expert Debate

Carbon Capture Essential for Net Zero 

According to the International Energy Agency, rapid scale up of CCS (also called CCUS) is essential to achieving net zero emissions targets. The technology plays four crucial roles in the net zero transition. 

First, it handles emissions from existing energy sources. Second, it offers an abatement solution for hard-to-abate sectors. Third, it could be a platform for green hydrogen production. Lastly, it removes CO2 from the air to compensate for emissions that can’t be directly avoided. 

Carbon capture, particularly DAC, is one of the focus of the upcoming climate change conference COP28 hosted by the United Arab Emirates. COP28 in the UAE will be a milestone moment when the world will get to know its progress on the Paris Agreement.

As the 2050 net zero target is getting closer, climate experts expect vast expansion of DAC projects to keep temperatures in line with the Paris Agreement goals. A climate scientist believes that the world absolutely needs carbon capture to get to safe warming levels. 

However, the current total carbon capture capacity stands only at around 45 million tons of CO2 a year. As per IEA analysis, that’s only 4% of CCS required by 2030 to be on track for net zero. 

Oxy’s new billion-dollar DAC plant Stratos aims to rapidly scale carbon capture by absorbing up to 500,000 metric tons of CO2 each year once it operates. That would make Stratos the largest DAC plant on the planet.  

• RELATED: Occidental to Buy DAC Innovator Carbon Engineering for $1.1B

The amount of carbon captured by the plant generates corresponding carbon removal credits. Tech giants, aviation leaders, and other major companies have already pre-purchase carbon removal credits from Oxy. 

Amazon, Shopify, Airbus, Houston Astros, and Houston Texans are just some of Oxy’s customers for forward purchase agreements. The US government is also pouring billions of dollars in support of the technology. 

Oxy’s Stratos is a next-generation DAC plant for capturing CO2 that remains more expensive today than Century’s technology.

According to the company’s estimates, it’s worth over $400/ton compared to below $60/ton to absorb CO2 from processing plants like Century. But DAC costs will go down eventually as Oxy learns and develops more of it. 

A rising number of corporations are willing to pay for higher carbon removal credits from capturing CO2. As more of them are getting serious about their net zero commitments, projections show that the market for carbon removals could hit hundreds of billions of dollars.

• READ MORE: CDR and CCS: A Primer

The challenges faced by Occidental Petroleum’s Century carbon capture plant highlight the complexities in running large-scale CCS projects. Yet, the potential of carbon capture technology remains crucial in achieving net zero emissions, underscoring the need for continued innovation and development in the field to address economic and operational challenges.

A pioneering climate tech company, Greenlines Technology, announced the approval of the world’s first carbon credit generation process patent awarded by the United States Patent and Trademark Office (USPTO). 

Greenlines Technology empowers and rewards sustainable behaviour in the mobility and e-commerce industries to make a positive environmental impact through its advanced digital measurement, reporting, and verification (dMRV) technology. 

The Vancouver-based climate tech startup is the first to coin the term ‘Human-based Solutions’ (HbS) in carbon markets, which refers to contributions by individuals and their behavior in reducing carbon emissions.

Greenlines: Pioneer Carbon Credit Patent in Transportation

The first-of-its-kind patent, Mobility Carbon Engine (MCE™), represents a significant advancement in global carbon markets, providing novel intellectual property rights. Titled “Methods and Systems for Conversion of Physical Movements to Carbon Units”, it has Patent Number US 11,774,255 B2.

Greenlines’ landmark patent enables mobility app owners to measure and monetize emission reductions facilitated by users. The groundbreaking technology can accurately calculate and monetize those reductions, setting a precedent for quantifying sustainable transportation impacts. 

• The newly patented technology has been around since 2019 in 60+ cities across Canada and the U.S.

Highlighting the importance of this technology in reducing emissions and promoting sustainability in mobility, CEO and co-founder David Oliver noted: 

“By providing a systematic approach to accurately quantify and recognize emission reductions resulting from individuals’ use of low-carbon land, water, and air-based transportation modes, the MCETM creates a comprehensive framework that rewards individuals and organizations for choosing sustainable alternatives.”

As per the ​Environmental Protection Agency’s latest data, greenhouse gas (GHG) emissions from transportation account for about 29% of total U.S. emissions, making it the biggest contributor of the country’s pollution. 

With over a third of Americans commuting to work on an average of 44 km or 27 miles, the annual CO2 emissions per commuter stands at about 4.6 tons. 

According to Oliver, if 10% of these commuters use their MCE, it can potentially slash their emissions by around 20%. That’s equivalent to a total of 24 million tons of CO2 emission reductions each year in the US transport sector.

• RELATED: Public Transportation Pricing Schemes Can Cut Emissions

MCE Transforms the Transportation Sector

The MCE is powered by Greenlines proprietary Modal Shift Optimization GHG Quantification Methodology developed according to ISO 14064-2. This guarantees that the carbon credits generated through the app meet the highest standards and trades at a premium price. 

The technology uses advanced algorithms to measure the emission reductions from each trip, avoiding reversal and ensuring offsets are permanent. It is simple to use and has a user-friendly interface, thus it is highly accessible to everyone. 

To meet the criterion on additionality, the MCE creates a custom baseline for each user and use it as reference for getting the emission reductions. The reduction is the difference between the baseline and the actual carbon pollution emitted by each trip. The data is crucial to ensure that the reductions are additional compared to the emissions without the offset project. 

• In establishing the baseline, Greenlines uses regional project and baseline emissions for various transportation modes – land, water, and air. These include taxis, public transit, ride-hailing, e-scooters, and pedal bikes. 

The innovative technology employs a robust monitoring system to track and verify the emission reductions. Verification is through independent, third-party verifier. And these verified emission reductions (VERs) have been successfully sold as carbon credits to voluntary buyers in the carbon market.

Greenlines’ carbon offset project is transparent with publicly accessible information, including the amount of CO2 reduced, the MRV process, and offset revenue use. 

Meeting all these criteria – additional, permanent, real, verifiable, and transparent – makes the carbon credits or offsets generated of high-quality. Each credit represents a tonne of reduced CO2 emissions. 

Greenlines’ technology offers a potential to revolutionize the mobility sector while providing a strong incentive for individuals to choose low-carbon trips. It empowers mobility aggregators, including transit agencies, trip planning apps, and private mobility providers to promote sustainable transportation practices. 

• RELATED: Google Earth Engine – Open for Business

Incentivizing Sustainable Behavior with Carbon Credits

The patent doesn’t only track and monetize emissions from personal trips but also from food and package deliveries, Oliver said. 

That’s through their upcoming E-commerce Carbon Engine (ECE), which is currently in its pilot phase. Same as MCE, ECE will also generate carbon credits from low-carbon items bought in e-commerce or online trading platforms. 

ECE uses Greenlines’ proprietary algorithms to get the CO2 footprint of each product, allowing consumers to choose low-carbon purchases. Thus, it also has the potential to slash emissions of online shopping. 

Greenlines had already implemented the MCE technology across various North American cities. But it also plans to expand its reach globally by initiating patent applications in other jurisdictions such as the EU. 

Their goal is to incentivize and drive sustainable practices worldwide through carbon credits generated by their patented technology. 

By combining innovative technology with sustainability, Greenlines revolutionizes carbon markets while giving commuters the opportunity to identify, quantify, and monetize their carbon emissions reductions.