(Bloomberg) -- Now isn’t the time to be betting on a boom in the market for carbon credits, according to the head of climate research at commodities hedge fund firm Andurand Capital Management.

The assessment follows a confusing period for buyers, sellers and traders of such credits, which are used by companies to offset their reported carbon emissions. An April 9 announcement by the world’s main certifier of corporate emissions goals, the Science Based Targets initiative, left the impression that companies may soon be free to ratchet up use of carbon credits. The move was hailed at the time as “massively consequential” by market participants. 

But too many risks remain for companies to dramatically step up their reliance on carbon credits, according to Mark Lewis, who heads climate research at Andurand.

“I don’t think you’re going to find people stampeding to buy credits to offset their Scope 3 emissions,” Lewis said in an interview. Scope 3 refers to the carbon footprint created by a company’s value chain, which was the category singled out by SBTi in its statement. It can account for as much as 90% of total emissions, depending on the industry.

Read More: Shell Was Largest Buyer of Carbon Offsets in 2023 by Far: BNEF

Luiz Amaral, the chief executive of SBTi, has sought to address the growing confusion triggered by the group’s April 9 statement. On Friday, he said SBTi hasn’t altered its standards, but added that “not all Scope 3 emissions are created equal.” For that reason, “difficult” discussions are needed to figure out how best to proceed, he said.

The group, which is backed by the United Nations, is contending with considerable pushback from climate experts — including within its own ranks — angered by the possible relaxation of rules around offsetting. Meanwhile, analysis by BloombergNEF and others indicates that some sectors won’t realistically achieve net zero without relying more on carbon credits.

If such instruments could be freely used to offset all Scope 3 emissions, it would help boost the market for carbon credits — currently valued at somewhere between $2 billion and $2.5 billion — to more than $1 trillion a year by 2050, according to Kyle Harrison, head of sustainability research at BloombergNEF.

Read More: Mega Boost for Carbon Offset Market Seen From SBTi Easing: BNEF

Traders and financiers took the April 9 announcement as an opportunity to position themselves for significant growth.

“We see this as a very positive step for the voluntary carbon markets,” Michael Curran, head of emissions trading at Vitol SA, the world’s largest independent commodity trader, said after SBTi’s initial statement this month. “This should help build demand as it will provide more flexibility to emitters to address their difficult if not impossible-to-directly-abate Scope 3 emissions.”

Ana Haurie, chief executive of carbon finance firm Respira International, called SBTi’s April 9 update “brilliant” and said it was “what was needed” in the market for carbon credits. 

“It’s absolutely the right signal to the demand side,” and “really cements the important role that carbon credits have,” she said.

The US, meanwhile, has announced a renewed push to enhance integrity in the market, marking a high-level endorsement of the instruments. Carbon markets “can help deliver the finance that developing countries need to help lead the clean energy transition and protect forests,” John Podesta, senior adviser to the president for international climate policy, said on Friday.

Ultimately, new guidelines affecting the use of carbon credits will have major implications for corporate climate strategies, and are set to draw scrutiny from lawyers and regulators as well as activists.

Against that backdrop, “you still have to wait and see exactly what the decision of SBTi means and how long it takes for them to put it in place,” Andurand’s Lewis said. “This is going to take a bit longer to play out.” 

Others agree. Serafino Capoferri, global carbon strategist at Macquarie, said he’s “skeptical” that SBTi’s decision “will lead to an immediate turnaround in demand for credits,” despite the “splash” its announcement caused in the market.

Legal professionals, meanwhile, say companies that expand their use of credits based on SBTi’s April 9 statement may be exposed to litigation risk. It’s also possible that such guidance will clash with climate regulations in the European Union, which is by far the world’s biggest market for climate investing.

Rosali Pretorius, a partner specialized in financial markets at law firm Simmons & Simmons, says the EU’s corporate sustainability reporting requirements make clear that carbon credits “cannot be used to meet emission-reduction targets that the company has to report.” That’s because, if a company has set such targets, it needs to disclose compliance on a gross basis. 

Carbon credits “can still form part of the firm’s climate change mitigation policy” under EU disclosure regulations, Pretorius said. But what regulators are most interested in is figuring out a company’s actual carbon footprint, rather than a net figure reached through offsetting, she said.

The voluntary carbon market via which carbon credits are traded remains unregulated and is still trying to clean up its image after a series of reports alleged widespread greenwashing in key projects. 

Given the context, the “problem” with SBTi’s April 9 statement is that it touches on an area that’s already the subject of court rulings, said Jonathan White, a lawyer at ClientEarth, a London-based nonprofit specialized in climate litigation. “It’s going to have a tail of issues.”

Climate experts — even those closely affiliated with SBTi — warn that persistent concerns around the quality of carbon credits mean reported emissions reductions often are misleading. 

“If you emit one ton and you purchase an emission reduction, you feel like that should add up to zero, but that’s not always true,” said Owen Hewlett, chief technical officer at Gold Standard, a nonprofit that hosts one of the world’s largest carbon credit registries, and a member of SBTi’s technical council. “The maths doesn’t work.”

Lewis at Andurand says that any relaxation of rules guiding the use of carbon credits such as those outlined by SBTi is “clearly bullish for the voluntary market — at the margin — because clearly it means there are potentially more buyers now than there were before.”

“But I don’t think there’s a stampede out of the door today to rush into the market,” he said.

Bloomberg Philanthropies, the philanthropic organization of Michael Bloomberg, founder and majority owner of Bloomberg LP, is a project-specific funder of SBTi.

What Bloomberg Intelligence Says:

“Low-emitting stocks in the MSCI Europe continue to beat the overall index on EPS estimates,” says BI’s Rahul Mahtani. “Our model identifies carbon-efficiency as the third strongest driver of 1Q EPS growth estimates, after price momentum and valuation.” 

Click here to read the full report.

ESG, Fundamental EPS Growth Drivers

--With assistance from Frances Schwartzkopff and Benjamin Elgin.

(Adds Macquarie comment in 15th paragraph.)

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