Carbon offsets will remain a critical part of miners' decarbonization toolkit, with Fortescue Metals Group Ltd. confirming it will still buy mandatory carbon offsets while avoiding voluntary ones to achieve "real zero" emissions by 2030.

Fortescue on Sept. 22 announced it would stop buying voluntary carbon offsets, with all funds allocated to carbon offsets to be diverted to its decarbonization plan. The company defines "real zero" as no fossil fuels, as well as no offsets unless they are used as a temporary solution while the required technologies to decarbonize are being developed.

However, to comply with the new Australian industrial emissions regime, the top-four iron ore producer will still "purchase any mandatory credits until such time as our emissions are so significantly reduced that we do not need to," a Fortescue spokesperson said Oct. 3 in an email interview.

"For years we have been saying that voluntary offsets don't work — they just pass the buck," the spokesperson said. "Rather than using them to reduce emissions, we are removing the use of fossil fuels across our Australian iron ore operations and replacing them with renewable energy ... We are focused on reducing emissions, not offsetting them."

Confidence eroded

Fortescue's decision on offsets came days after the EU banned advertisements that make claims based on emissions offsetting schemes that a product has a neutral, reduced or positive impact on the environment.

Mismanagement and lack of transparency "within carbon markets have eroded confidence in the effectiveness and integrity of these markets, leading companies to be cautious of actively participating," according to Amy Steel, co-leader for Oceania and climate risk at ENGIE Impact LLC, a sustainability and energy consultancy.

According to Nicholas Boyd-Mathews, chief investment officer for mining-focused environmental, social and governance (ESG) fund Eden Asset Management Pty. Ltd., 70% of the European institutional investors he regularly interacts with say offsets are not the answer.

"A lot of risk capital and project financing comes from Europe and they are by far the most developed as it relates to ESG and sustainable finance," Boyd-Mathews told S&P Global Commodity Insights on Oct. 2. "For this reason, I believe capital will flow to companies that have more robust ESG strategies that go beyond simply offsetting emissions and hence [have] sound rationale to avoid credits where possible."

Offsets have a limited role to play "in situations where it is currently difficult to avoid or reduce pollution," such as steelmaking, and they "should not be used as an alternative to making genuine cuts to emissions or as the sole basis for making 'net-zero' or 'carbon-neutral' claims," said Greg Bourne, energy transition councilor of Climate Council, an Australian nonprofit.

Future of offsets in mining

Boyd-Mathews believes Fortescue's move away from offsets is "a trend you will continue to see more and more."

"We expect it to come from new and single asset operators who have greater flexibility in their operations. A lot of legacy producers will need to rely on offsets in the short term given the significance of their emissions and operations. We also expect to see the 'green premium' and 'net-zero producer' markets to mature over the coming years, further incentivizing these companies to go green and without credits," Boyd-Mathews said.

Offsets are still critical to miners' decarbonization efforts, Steel said. The consultancy advises using offsets for residual hard-to-abate emissions as "the last decarbonization lever."

The decision on whether or not to use offsets will be unique for each company, influenced by factors such as access to capital, technical ease of decarbonization and buying power along the supply chain, Steel said.

"If the future trend in offset pricing continues to grow, other players may consider following suit," Steel said.

For instance, Alcoa Corp.'s strategy to achieve net-zero greenhouse gas emissions by 2050 "uses the mitigation hierarchy including, where necessary, high-quality carbon offsets," a spokesperson said in an email interview.

Developing its own nature-based solutions and securing carbon offsets "remain a key part of our decarbonization program as we work toward our medium and long term carbon reduction targets," according to Rio Tinto Group's 2023 interim results.

BHP Group Ltd., however, does not plan to use carbon credits and offsets in its efforts to reduce operational Scope 1 and 2 greenhouse gas emissions by at least 30% from fiscal 2020 levels by fiscal 2030, the miner said in June.

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