This week the Financial Times1 broke a story about how Shell, the international fossil fuel conglomerate, sold millions of so-called ‘phantom’ carbon credits to affiliates and third parties.
In an ethical and properly functioning carbon market an organisation can be issued with credits to reflect an amount of carbon dioxide which that organisation has sequestered or the emission of which the organisation has otherwise prevented. To provide an economic incentive to create what amounts to a public good (i.e. the reduction of pollution), these credits, or certificates, can then be sold to other organisations, and matched against an equivalent unit of carbon emission. The credit is then expunged.
However, in the case of Shell, approximately 6 million of the credits it sold to buyers were completely unearned. Whereas we do not know the precise terms of the sales, taking the market average price for carbon credits over the 8-year period in question, it is possible that more than half a billion Canadian dollars would have changed hands.
However, this revenue did not, it is alleged, actually reflect the sequestration by Shell of 6 million tonnes of carbon dioxide, which instead entered the atmosphere as pollution. (Putting that figure in context, 6 million tonnes of carbon dioxide is about what London, a city of 9 million people, produces in two months.) One oil producer was selling meaningless credits to other oil producers, generating income from a scheme intended to reward environmental responsibility.
You may be asking, why were the buyers – and these included Chevron, Canadian Natural Resources, Imperial Oil, Suncor Energy, and even some of Shell’s subsidiaries – willing to pay for Shell’s phantom carbon credits? One answer is that they may not have known, having taken the validity of the credits they were buying at face value.
We have talked elsewhere about the importance of auditors in the carbon market: organisations whose role it is to study and verify the processes which it is claimed have given rise to carbon sequestration.
It is worth noting here that issuers play an equally important role. In the case above, it transpires that the government of the Canadian province of Alberta had been issuing credits to Shell on a ‘two for one’ basis for a number of years as an inducement to the petroleum giant to drill in the Fossil Sands oilfield, bringing tax revenue and employment to the area. Whereas a direct subsidy would have been unaffordable, and perhaps even illegal if not merely reputationally ill-advised, the provincial authorities had alighted upon the issuance of bonus credits as a way to make Shell’s venture commercially more attractive. The result was a boost to Shell’s top line but global emissions made worse.
So, what did Shell actually do wrong, if anything? Shell did not break the law, it seems, or even mislead the issuer. Rather, the power dynamics in place allowed Shell to negotiate a sweetheart deal that undermined the very purpose of carbon credit trading.
There is a lesson for potential buyers of credits, in particular those who are offsetting voluntarily, and therefore are more concerned with the actual outcome of the scheme that gave rise to the credits, and not the letter of the law; either out of genuine concern to reduce emissions, or to avoid accusations of ‘greenwashing’. There is also a lesson for sellers of carbon credits, or indeed of any saleable natural capital offsets.

Most aka.land members are small to medium-sized landowners, rather than international conglomerates with significant bargaining power at a governmental level, meaning that, unlike Shell, they cannot ‘artificially’ multiply their natural capital output. What they can do, however, is pair with credible issuers and verifying bodies, thereby giving comfort to buyers of their credits, as well as meticulously and directly recording the positive environmental impact of their schemes, for example with photographic and videographic surveys, soil analysis, and so on. Certain verifying bodies may, for intellectual property protection reasons, be unable or unwilling to disclose how their audits were carried out, but by undertaking your own work as the landowner, you are better able to stand behind the claims of positive environmental impact which underpin the credits you sold or are selling, to the marketplace.