Three Ways to Add Credibility to the Fragile Market for Emission Credits (2)

By Mathew Carr

Nov. 10, 2020 — LONDON: The market for voluntary carbon credits is under regulated and that’s why it’s much too small.

The coronavirus pandemic has dealt a further huge blow to the industry because airlines are one of its biggest sources of demand growth.

Mark Carney, former Bank of England governor, said yesterday (Monday) the market needs to turn over about $300 billion a year instead of the $300 million annually that it currently delivers.

Ultimately, the offsetting industry “will soar” to help nations and companies hit net-zero emission targets by the middle of the century, Carney told the Green Horizon Summit. Today, a taskforce of offsetting, finance and industrial executives will publish a consultation document in a bid to make the system work better from next year.

On Tuesday, the taskforce published its consultation, which included recommendations to establish core requirements of offsets and spot and futures markets to allow risk management by companies seeking to cut emissions to net zero.

For more information on the consultation, see this:
https://www.iif.com/Portals/1/Files/TSVCM_Consultation_Document.pdf

Outside the consultation, here are three key ways to improve the market, according to key market insiders.

1. Complete the Paris climate deal rules, including tighter emission-reduction targets

“It will be tricky to make voluntary markets more credible immediately without more government involvement,” said Louis Redshaw, founder of carbon trading specialist company Redshaw Advisors, who’s participated in greenhouse gas markets for almost two decades.

One key element of the Paris deal that needs to be sorted is how to account for emission trades to ensure two different countries don’t seek to take credit for the same emission-reduction. For instance, the voluntary market could include a register that tracks how nations adjust their compliance targets when they trade emission credits, a process known as “corresponding adjustment.”

Graffiti, East London


The lack of rules has curbed interest in the market. This process of making “corresponding adjustments” to compliance targets (which are voluntary under Paris) threatens to limit use of credits until rules are agreed next November at the earliest. Then, they’ll be debated at the UN climate talks planned for Glasgow.

Even compliance carbon markets remain too complicated, so lawmakers around the world should be motivated to do a deal, said Redshaw.

“Germany has set up a completely new carbon market for transport and heating on the side (of the EU carbon market,” he said. “Countries are doing their own thing, the best they know how — the whole thing is just a bit of a joke really. Just grasp the nettle and get on with it” is Redshaw’s message to politicians.

In the meantime, the problem with the unregulated voluntary market is purchasers struggle to categorically know that what they bought has solid environmental merit.

 “Few buyers seem to know the value of what they are buying,” Redshaw said. “Everything is smoke and mirrors behind closed doors. These are the people supposedly doing something good for the environment and in actual fact many of them seem to be interested only in lining their own pockets.”

Redshaw generally limits its profit margin to 15% as a point of difference in a market where some suppliers overcharge their customers, he said.

2. Buyers will offset more than they need, signalling climate restoration, not just strict compensation for damage

Instead of buying enough credits to cover the greenhouse gases they’ve emitted, businesses and individuals can buy 1.5 times or even 2 times the volume of credits, said Nick Gogerty, managing director at Carbon Finance Labs, a unit of oil company Occidental.

Buyer will be interested in not just compensating for the volume of heat-trapping gases produced, but going far beyond that, Gogerty said.

“People want to have trust in buying a solution,’’ he said. “Having an x multiple to the carbon footprint of a service means that the mitigation wasn’t just good enough, but really aspired to make a difference’’ — the finish line shouldn’t be mitigation, but restoration, he said.

He cited a clothes maker that claims to mitigate ten times the CO2 impact of each woollen sweater’s full lifecycle. See this:

https://sheepinc.com/pages/carbon-negative-future-positive

The concept of restoration is taking at least some hold, with China using the notion in its five-year plan beginning 2021.

Additional demand in the voluntary market will also boost prices, which remain very low, at about $3 per ton, according to Ecosystem Marketplace.

That shows that the voluntary market isn’t in good health. Many oil companies are assuming carbon prices of $80 a ton for projects, according to Carney, who cited data from investment bank Goldman Sachs & Co. And that level is more than double current compliance-carbon-market prices in the European Union.

Click this link for an interactive chart that shows how much it will cost to double offset your tank of gas:

https://grid.is/@ngogerty/cost-to-carbon-offset-fuel-1x-2x-per-gallon-kZFI4sQQShy1Nu67U_6Oww

Here is a screen shot of the interactive chart above – please click to see how quickly the cost of your tank of petrol will rise as carbon prices go up. Source is Carbon Finance Labs



3. Buyers will adjust their demand according to the task at hand — the nature of emission credits changes over time

In broad terms, greenhouse gas projects are meant to generate emission credits only if they use technology beyond “business as usual” standards.

The concept, known as “additionality,” changes as technology improves. Should a solar farm in a least-developed country already be able make money based on prevailing electricity market conditions, it should not also attract carbon credits, for instance. That’s because it would not be an “additional” project spurred by the credits.

Seeking to use old credits to offset a person’s or a company’s emissions all the way through 2050 probably isn’t the right thing to do, said Yvo de Boer, who was executive secretary of the UN Framework Convention on Climate Change from 2006 to 2010.

It’s like owning a really polluting old motor car and claiming it’s ok to continue to drive it because it was compliant with emission rules at the time it was sold, he said.

“Additionality is a dynamic concept,” de Boer said by phone.

There are companies producing high-quality credits even before the Paris rules are finished, he said. De Boer is president of Gold Standard, an organisation that helps ensure projects that reduce greenhouse gases have environmental integrity.

“There are a group of individuals willing to sell you absolute rubbish in terms of claimed emission reductions, but there is also a group…where environmental integrity is agreed,” de Boer said.

Many of the methodologies used in the first two decades of carbon markets remain credible if they are adjusted over time, he said.

They may be needed because “the voluntary market is growing,” de Boer said. “You see huge numbers of corporates committing to scientific goals. The demand is there already.”

The start of the UN’s global airline carbon market known as Corsia (the Carbon Offsetting and Reduction Scheme for International Aviation) means the market faces substantial expansion once the coronavirus pandemic is over.

Accounting treatment and marketing claims will probably be scrutinised more and more closely.

For instance, it’s “inevitable that carbon markets will begin to differentiate between credits with Corresponding Adjustment and those without,” Gold Standard said in a report on the market’s future earlier this year. See this:
https://www.goldstandard.org/sites/default/files/documents/2020_gs_vcm_policy_consultation.pdf

So, producers of emission credits, including those in emerging nations, face a raft of new rules and market dynamics as they seek to ensure their offering remains relevant.

Gold Standard’s expectation is that rules will “evolve to keep pace with market changes, enabling new, high-impact technologies to come into play that wouldn’t otherwise be competitive,” the group said Wednesday, by email.

(Updated Wednesday afternoon London time, updated Nov. 23 with Carbon Finance Lab interactive chart)

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