GHG-verified mechanisms for internationally traded crude oil and possible impact on oil benchmarks

The specter of climate change has impacted shareholder sentiment making many market participants evaluate their business models in accordance with Cop-26 pledges – looking for ways of winning the mandate for capital in a sustainable way. The most familiar approach to reducing carbon footprint is by creating ‘GHG-verified’ claims. Typically, these involve a verified account of supply chain emissions, which are then offset through the retirement of carbon credits – themselves generated by projects that aim to reduce or remove carbon-equivalent emissions and are traded in voluntary carbon markets (VCMs). Trades have been reported for GHG-Verified or ‘carbon neutral’ (and carbon equivalent) LNG, crude oil, naphtha and condensate – with the largest share seen in the LNG market. The rationale for these trades to date seems to have been twofold – to capture a degree of environmental prestige and to test the market’s ability to deliver an operational framework. While the former of these faces the challenge of convincing investors and consumers, the latter faces the need to convince not just the market but ultimately policymakers and regulators. Already governments are looking at including carbon accounting not just in domestic frameworks but into trade legislation. Despite: ‘… methane emissions from oil imports as important as (and in many countries more important than) those from pipeline gas and LNG…’, the research in the GHG emissions for crude oil has been relatively sparse. This is partly due to the complexity given hundreds of different grades of oil, transportation and widely different refining processes. The aim of this paper is start a discussion regarding data, policy and commercial transactions in regards to the oil emissions and present some instruments which may provide tools to reduce such emissions or, at very least, promote transparency necessary for further progress. Our principal focus is a framework for internationally traded oil and we suggest a direction for further research.

By: Jonty Rushforth