Carbon offsets are imperfect but necessary and the market needs to grow fast, says B of A exec

Companies and governments are racing to release pledges and commitments to decarbonize. Those goals mean the markets for carbon offsets need to get massively bigger and more standardized very quickly.

So says Karen Fang, who leads sustainable finance for Bank of America.

Right now, organizations are making best-faith estimates in their decarbonization plans — but they are only estimates, Fang told CNBC.

“I think the skepticism is always justified, because if anybody tells you today they know exactly every single technology, at what pace they’re going to develop, how much and how fast will it take green hydrogen to break even with fossil — I think that’s not credible,” Fang said. “Anybody who says they know the answer is not credible.”

Fang knows what organizations are dealing with because she is steering the decarbonization plans for Bank of America and all of the organizations, institutions, and municipalities it lends money to, invests in, or otherwise finances.

Bank of America’s goal is to achieve net zero greenhouse gas emissions in its financing activities, operations, and supply chain before 2050. 

“Every single client that gets money from, financing, or investment from Bank of America, their emissions matter to me,” Fang told CNBC. “We spend so much time talking to the C-suite or top management at every client, institution, organization, corporation, because their plan affects our plan.”

There are three levels of emissions that organizations track, called scope 1, 2 and 3.

Scope 1 emissions are the direct emissions that come from operations that are owned or controlled by the organization in question. Scope 2 emissions are the indirect emissions resulting from the generation of electricity, steam, heating, or cooling consumed by the organization.

Scope 3 emissions include all indirect emissions that come from the value chain or supply chain of the organization in question.

Tracking scope 3 emissions requires an organization to question everything: “Where is this piece of paper coming from? Where is the vendor? How is the vendor producing the product you’re using, like your pen?” Fang said.

To get to carbon neutrality, organizations will have to use carbon offsets, especially to compensate for scope 3 emissions.

That should be seen as the honest route, not a cop out, Fang said. But carbon accounting and offsets must be standardized.

“What is the most defendable, credible way of using offsets in your business in your scope, one, two and three reduction process, but without being seen as just taking the lazy way out? Fang said. “We’ve done everything we could — you still have that last bit. And we we’re not being laissez faire, we’re not being lazy. We’re actually saying, ‘We have everything we could, there was this residual bit, we want to basically offset'” that last bit.

Not only does the carbon offset market need clearer and more enforceable standards, it also needs to get a whole lot bigger very quickly.

Last month, Bank of America said in a research note that carbon offsets issued in 2020 were equivalent to 210 million metric tons of carbon dioxide emissions either removed or avoided. That’s equivalent to only 0.4% of total global emissions.

Achieving net-zero emissions by 2050 will demand approximately 7.6 gigatons of carbon dioxide offsets or removal, BofA said. That could require as much as a fifty-fold increase in the offset market. At the very low-end, the market for offsets will quadruple, the bank said.

Today, there are four primary registries for carbon offsets: Verified Carbon Standard, or Verra; The Gold Standard, the American Carbon Registry and the Climate Action Reserve. All are non-profit, non-governmental organizations.

“I almost hope, maybe this is naïve, that they could all come together with a unified form of standard recommendation,” Fang said.

“Because the world needs it and needs a lot of it and needs a lot of really, really, fast,” she said.

While the carbon offset industry gets a bad reputation, Fang said, that’s largely due to a small number of nefarious cases of abuse. They’re not all bad.

“Planting a tree is better than not planting a tree. I don’t think anyone can argue with that, from a carbon perspective,” Fang said.

The upcoming collection of world leaders at COP26, the 26th United Nations Climate Change Conference om Glasgow is an opportunity for supporting a carbon offsets standardization. The Group of Seven (G7) and the Group of Twenty (G20) or the United Nations are all the kind of governing body that could put forth accepted guidance for the industry, Fang said.

“We don’t have a choice,” Fang said. “We have to be very pragmatic and don’t let perfect be the enemy of the good.”