Rising carbon offsetting costs poses price challenge for UK businesses

The cost of corporate carbon offsetting could double by the end of the decade and increase by a factor of thousands under a carbon capture scenario by 2050 as businesses race to meet Net Zero targets, according to new PwC analysis. 

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

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

The purchase volume of offsets varies by industry and, therefore, so does exposure to potential offset price variation. The energy sector, for example, reported the highest purchases of voluntary offsets in 2022, amounting to £27 million. 

Based on the same two price scenarios, this cost could rise to between either £249 million and £1.8 billion at the respective 2050 and 2037 peaks outlined above, which would represent a sector average of between 1.2% and 8.5% of 2022 gross profits.

Challenges with transparency

PwC’s analysis of FTSE350 reporting in 2022 found that 118 companies (34%) included a reference to carbon offsets. However, only 19 companies made reference to the cost of offsets, and just seven referenced potential future price increases, representing just 2% of the whole FTSE 350.

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. 

PwC analysis has found that no companies in the FTSE 350 currently report voluntary purchases of carbon capture offsets, or removal projects, and the majority of offsets purchased are avoidance offsets. 80% of total offsets purchased were from avoided deforestation, mixed and renewable energy project types.

Ian Milborrow, Sustainability Partner, PwC UK, comments: 

“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.”

To read the full report please visit: https://www.pwc.co.uk/who-we-are/our-purpose/building-trust-in-the-climate-transition/considerations-accessing-high-quality-carbon-offsets-part-net-zero-transition.html