Rising carbon offsetting costs poses challenge for UK businesses

The cost of corporate carbon offsetting could double by the end of the decade, as businesses race to meet net zero targets, according to a report by PwC.

The study estimates that in 2022, FTSE 350 companies publicly reported purchases of voluntary carbon offsets totalling £38m. Based on current pricing models, PwC has calculated that by 2030, this same volume of offsets would cost companies more than £135m – a 256% increase. The report estimates prices will continue to rise until 2050, when the cost of the same volume of offsets may peak at £365m.

However, the report also identifies that 80% of the volume of offsets reported to have been purchased in 2022 were classed as avoidance offsets, derived from projects such as avoided deforestation. Importantly, there is growing momentum that only removal offsets (those generated from projects that extract and permanently store CO2) should be permitted.

In this case, where only removal offsets can be purchased, PwC has calculated that the same volume of voluntary offsets FTSE 350 companies purchased in 2022 for £38m would cost £438m by 2030 (a 1,051% increase). Prices are expected to peak in 2037, where the cost of current FTSE 350 purchases would rise to £2.6bn.

Companies do not routinely disclose what they pay for carbon offsets due to commercial sensitivity, however this lack of transparency makes it difficult for investors and other stakeholders to gauge how these risks might affect individual companies’ net zero transition plans.

Ian Milborrow, sustainability partner at PwC UK, said: “Companies across all sectors must consider the potential financial impacts of rising offset prices as part of their net zero planning. If we get to that stage where the use of offsetting to reach net zero targets becomes sufficiently expensive so as to become unviable, and in the absence of other strategies, companies will be unable to meet their net zero commitments in the timeframes they have published.

“There are a number of steps that companies can take to address these challenges, including making longer-term offset purchase agreements, developing internal carbon pricing mechanisms and, wherever possible, focusing on decarbonisation to reduce their exposure to future offset price rises. In addition, clear, consistent disclosure of a carbon offset purchasing strategy through annual and sustainability reporting – within the limits of commercial sensitivities – will provide critical transparency and reassurance for investors.”

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