Energy Insights 2021 Issue 5

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3 8 INSIGHTS In addition to these compulsory regimes, there is a growing trend of other sectors voluntarily taking accountability for their emissions and demonstrating climate leadership. These sectors are increasingly using carbon offset credits (as well as effecting emissions reductions) as a means of lowering their carbon footprint and achieving emissions reduction targets. To provide a starker illustration of the power of offsetting, even traditional high-GHG emitters such as liquefied natural gas and crude oil suppliers are marketing "carbon neutral" cargos, offsetting credits against the emissions generated from extraction and production. The justification for carbon offset credits stems from the premise that: (a) the technology to allow these sectors to become zero carbon emitters does not currently exist (or exist at a commercially reasonable price); and (b) reporting entities will have limited control over their Scope 3 emissions3. A carbon offset credit is issued for sale by a project for each metric tonne of carbon-dioxide equivalent ("MTCO2e") which it permanently removes from the earth's atmosphere. Carbon offset credits need to be recognized by administrative registries for mandatory regimes or independent certification bodies to be redeemed against emissions. However, the use of carbon credits is not without controversy. Critics argue that their environmental benefit often falls short of the intended impact and that they have become modern day indulgences, bought by deep-pocketed emitters to "greenwash" over a failure to reduce emissions. A broad menu of carbon offset projects exist for credit purchasers to avail themselves of, including: • renewable energy projects (and, in the coming years, green hydrogen projects); • Direct Air Capture ("DAC") and Carbon Capture Use and Sequestration ("CCUS")4 projects; and • afforestation, avoided deforestation and other land management projects such as planting seagrass beds, mangrove trees, indigenous vegetation and natural regeneration. The threshold hurdles in petitioning a registry or certification body to accept a carbon offset credit are: • permanence of the removal of the GHG – the project must be able to demonstrate that the GHG will remain sequestered for a sufficiently long period of time to be considered permanent5. • additionality of the offset project – the project must be able to establish that it would not exist but for the purchase of the offset credits it generates. As the price of renewable energy has fallen in recent years to allow it (in certain markets) to become cost competitive with conventional power plants, some certifying bodies have refused to issue carbon offsets certificates for renewable energy projects. • territorial limitations – the siting of an offset project may be dictated by the existence of suitable natural properties (e.g., the presence of a permeable reservoir in a geological formation 06 The Rise of Carbon Offsetting

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