Carbon-intensive industry participants are stepping up efforts to curb their carbon footprint in their value chain as they come under increasing pressure from governments and regulators to pare emissions following the COP26 summit. They are also subject to environmental scrutiny from investors and regulators, as well as lenders. This explains the emphasis on making commodities carbon neutral. Carbon-neutral commodities have seen considerable interest from producers and users seeking to address environmental woes while sustaining shareholder returns.
Carbon-neutral commodities involve offsetting carbon emissions through the purchase of carbon offsets. Carbon neutrality can be achieved by offsetting a product’s emissions during its life cycle (all the emissions through the production, transportation and use of the product or service).
Greenhouse gas emissions of a product through its life can be categorised into three ‘scopes’:
- Scope 1: Direct emissions from owned or controlled sources
- Scope 2: Indirect emissions from the generation of purchased energy
- Scope 3: Indirect emissions (excluding scope 2) from use
Although a commodity continues to generate emissions along the supply chain and during its use, the attendant carbon footprint is measured, verified and offset through the purchase of carbon credits. As a consequence, carbon-neutral commodities are gaining traction. Industry names finding it technologically impossible to lower carbon emissions immediately can bundle their products with quality carbon credits and continue their business. Overall, there is heightened awareness of emissions that should be considered or offsets that can lead to climate neutrality, enhancing confidence among customers and regulators alike.
Decarbonising carbon-intensive commodities enhances the environmental competitiveness of markets involving heavy carbon emissions and permits producers to sell differentiated and premium green products that buyers looking for find attractive.
The first carbon-neutral commodity trade took place in 2019 when Tokyo Gas and GS Energy purchased carbon-neutral LNG cargo from Shell. Under the terms of this trade, Shell committed to removing carbon emissions generated through the life cycle of the cargo covering the first, second and third scopes. Deals in the carbon-neutral commodity market are highlighted below.
The globally accepted mechanism of monitoring, reporting and verifying emissions across all stages of the commodity supply chain would increase accuracy and promote acceptance of carbon-neutral products in the industry. Many companies, such as Pavilion and Wood Mackenzie, are developing such a framework as demand and growth expectations for carbon-neutral commodities continue to build.
The management of supply and price risk in the carbon offset market will likely be pivotal to the development and acceptance of carbon-neutral commodities. The voluntary carbon offset market can provide liquidity, standardisation and credit quality necessary to meet the demand for offsetting carbon-intensive commodities. Voluntary offsets allow firms to cut carbon emissions outside a regulated framework and adopt near-term measures to meet carbon reduction goals such as achieving carbon neutrality within the supply chain.
While the carbon-neutral commodity market is at a nascent stage, it has the potential to expand and become more flexible shortly. The growth will likely be a function of government and corporate climate goals, regulatory environment and access to sustainable finance.