Shell Plc has announced plans to divest a portion of its nature-based carbon projects amid challenges facing the carbon offset market, also known as the voluntary carbon market. This strategic move aligns with CEO Wael Sawan’s emphasis on enhancing profits through high-return ventures, particularly in the realm of fossil fuels. Sawan’s strategic shift involves moving away from ventures that lack a strategic advantage, such as offshore wind projects.
This decision underscores Shell’s revised strategy and realignment of its low-carbon commitments. While the company previously focused on substantial growth in low-carbon initiatives, it is now prioritizing areas that offer more robust returns. The journey of Shell’s Carbon Credits began in 2018 with the launch of its nature-based carbon offsets portfolio, aiming to generate 120 million carbon credits annually. These credits originate from REDD+ projects designed to combat deforestation, with each credit equating to one ton of carbon dioxide emissions avoided.
By 2022, Shell had become the largest publicly known purchaser of carbon credits globally, as reported by BloombergNEF. However, the market has encountered recent challenges, with spot prices for REDD+ credits plummeting to an average of $3.60 per credit in 2023, a stark decline from $12.50 in 2022, according to MSCI Carbon Markets. Data from Viridios AI also indicates a downward trend in REDD+ carbon credit prices for 2018 and 2022 vintages across all regions, reflecting diminished demand and skepticism regarding the environmental benefits of certain projects.
Shell retired 20 million tonnes of carbon offsets in 2023, a significant increase from the 4.1 million tonnes recorded in its 2022 net carbon intensity figures. According to the company’s Energy Transition Strategy 2024 report, carbon dioxide emissions from the energy system accounted for nearly 75% of global greenhouse gas emissions in 2023. Despite this, Shell remains dedicated to reducing emissions from its operations by 50% by 2030 compared to 2016 levels. Many major corporations, including Shell’s industry counterparts, are turning to carbon credits to offset their remaining emissions, with projections indicating that the voluntary carbon market could potentially reach $950 billion by 2037 from its current $2 billion value.
Nevertheless, Shell faces challenges in sourcing carbon offsets that meet its stringent quality standards. Under Sawan’s leadership, the company’s carbon strategy has undergone a notable shift. Sawan assumed the role of CEO in January 2023 and promptly altered Shell’s approach to carbon projects. Within six months of his tenure, Shell revised its plan to allocate $100 million annually to new carbon credits, as part of Sawan’s strategy to place a greater emphasis on fossil fuels, diverging from certain targets set by his predecessor.
This strategic pivot is evident in Shell’s evolving approach to its carbon credit portfolio. Presently, the company is exploring the sale of some of its carbon projects while intending to retain a minority stake. Discussions are ongoing with private equity firms expressing interest in acquiring these projects, with Shell considering various deal structures. One option involves selling its share in the projects while committing to continue purchasing the credits, while another option entails selling the projects without any obligation to buy credits, albeit potentially posing challenges in finding buyers.
This move comes at a time when the voluntary carbon market is undergoing transformations, with increasing demand in the Asia-Pacific region for credits compliant with specific local regulations. Simultaneously, the Integrity Council for the Voluntary Carbon Market is advocating for heightened standards, influencing buyer preferences.
As Shell diminishes its focus on nature-based carbon projects, it may explore engineered carbon removal technologies, such as direct air capture (DAC), which extracts carbon dioxide directly from the atmosphere. While these technologies provide a more permanent solution for carbon removal, they remain costly and necessitate substantial scaling. Many DAC firms are now aligning with stringent carbon accounting standards to meet buyer and carbon credit exchange requirements.
Kyle Harrison, head of carbon markets at BloombergNEF, anticipates a growing trend towards these solutions, noting that as costs and scalability improve, more companies are likely to adopt such technologies. Shell’s decision to divest a portion of its carbon portfolio signals a shift in its climate strategy towards prioritizing profitable ventures and exploring advanced carbon removal technologies. This strategic evolution mirrors the changing landscape of the carbon market and has the potential to redefine Shell’s role in the energy transition.
