As the Climate Crumbles, Ten Things You’re Probably Missing About Markets Most Likely to Solve the Crisis (1)

–Carbon market leaders (and detractors) discuss how voluntary carbon markets can fire up in the era of the Paris climate deal, speaking in interviews with CarrZee and at an International Emissions Trading Association event (see link at bottom)
–More credible version of carbon markets comes into focus

By Mathew Carr

July 9-13, 2021 (LONDON): Voluntary carbon markets are much misunderstood, even though they are increasingly crucial. Here are ten examples of how and why … and a little about what to do about it.

UN climate envoys and private-sector representatives are trying to put together rulebooks that will help encourage trillions of U.S. dollars equivalent to flow into projects and programs to avoid and remove greenhouse gases.

Can free markets be built to tame the climate crisis after 30 years of failing to do so? Most people believe they can, but it’s freaking difficult.

One Scenario of How Carbon Credit Supply and Use Will Play out Under Paris

Source: CarrZee and friends. I’m not saying this is the most likely scenario or even a likely one. VCM: voluntary carbon market. 6.2 of Paris allows countries to cooperate. 6.4 of Paris sets up a new global UN carbon market. This scenario assumes envoys fail to agree a solid rule book for carbon trading and accounting in Glasgow at the UNFCCC talks in November.

Ten misconceptions about voluntary carbon markets:

Number 1. They are only meant to cut emissions. No.

While it’s true carbon markets won’t take off unless they help incentivize emission cuts around the world, the real reason the world needs voluntary carbon markets urgently (as well as compliance carbon markets of course) is to help prevent continued climate injustice.

Without more justice, a climate solution won’t be agreed at United Nations level this November at talks in Glasgow — UN decision making requires simultaneous global consensus by all nations, afterall.

The money flowing into and out of the voluntary markets, if managed well, can help reduce injustice and maybe even help spur agreement in Glasgow.

A small percent of the world’s population has caused almost all of the climate crisis — under 1 billion people (the richest 13% of 8 billion people on earth). The rest are suffering the impact and are much less able to deal with it because of their lack of wealth. The biggest villains in broad terms are the top 1% of wealthy people, who hold the most political and economic power globally and are most responsible for the continued failure of market structure.

“We need system change. This’s what people are asking for,” said Anna Lehman, global policy director at Wildlife Works, which operates carbon credit projects, including in Africa.

Many commodities — from coal to iron ore to coffee — already flow from poor nations to rich countries, where most value is added and wealth created. It’s and unsustainably unfair trade system, which the World Trade Organization is seeking to tweak.

Without the ability to trade carbon across borders, the rich global conglomerates most responsible for global warming will invest in their home countries to cut emissions. The climate and economic unfairness will ramp up and extend.

About 15 years ago, when the carbon markets first got going in a fairly big way in Europe, rich-country brokers and institutional investors took an unfairly large portion of the profits from carbon credits as prices surged, even though the credits were created in developing countries.

This time around, under the Paris climate deal, “price transparency and a profit sharing agreement are absolutely critical,” Lehman says. “We need to ensure that we are not just extracting another resource from the global South.”

Most carbon credit purchase agreements are already highly structured, so can include clauses to ensure buying entities or middle men don’t take too much of any profit available in the credit’s supply chain. Ledger technology, artificial intelligence, can help too, boosting transparency and confidence in the system as it prevents too much profiteering.

Unless countries take on more ambitious targets, there won’t be enough price tension in markets to raise carbon prices. The global carbon trading system will remain broken. The UNFCCC has called on countries to update their nationally determined contributions (climate pledges under Paris) by the end of this month. That’s what Patricia Espinosa, head of the UNFCCC, has called for.

Many emission-project developers in developing countries don’t see themselves as operating in a market, but they see themselves as attracting climate finance and help to solve climate injustice, said Sandeep Choudhury, founder of VNV Advisory, which creates emission credits.

Number 2. Voluntary Carbon Markets Deter Ambition on Climate Pledges. Not Necessarily.

As above, by spurring financial flows and showing developing countries how markets can help climate justice, voluntary carbon markets can encourage the world’s 200 nations to agree carbon-market rules in Glasgow in November AND IMPORTANTLY encourage them to lodge updated ambitious nationally determined contributions (NDCs).

Tighter NDCs with stricter emission limits for 2025 and 2030 will spur higher carbon prices and more demand for carbon offsets. That’s because tighter targets will require steeper emission cuts from corporations around the world.

The failure of markets so far to provide enough demand at the UN level is understandably making emerging nations doubt that markets can provide a useful solution. The key is to show nations how markets can allocate capital efficiently.

If voluntary carbon markets don’t encourage strict NDCs, there’s a real risk poorer countries will limit NDC ambition and seek to get capital directly from large corporations outside the scope of their own NDC.

But, here’s the rub. Carbon credit projects know they will get a higher price for their credits if the projects producing them have the Paris UNFCCC stamp and the right checks and balances. Carbon credit developers need to push countries during the next four months to go down that tighter NDC route and to embrace voluntary markets and Article 6 of the Paris deal, which covers global carbon markets. (Even under Paris, carbon markets are voluntary — countries can choose to use them or not.)

I reckon that if voluntary carbon projects merge with Paris rules, that’s probably the best solution because that will attract the highest price for emission credits and shift capital to clean projects more quickly. That’s what happened earlier this century when the UN Clean Development Mechanism briefly took off.

Others strongly disagree.

“If voluntary carbon projects merge with Paris rules, with the ensuing red tape and bureaucratic hurdles, it will be the end of the voluntary carbon markets. And I am not sure Article 6 projects will get higher prices. Voluntary carbon markets are functioning, Paris carbon markets are not and it will take a while for them to become operational,”said Adriaan Korthuis, founding Partner at Climate Focus, which advises on carbon markets and climate policy, by phone and email.

Number 3. Carbon Projects Are Dodgy, Riddled With Corruption. They (Mostly) Aren’t.

Sometimes projects have to sell their carbon credits at a low price because of the aforementioned broken system. Better transparency and tracking systems will make any corruption less likely.

Still, better regulation is needed. The UN system is already incorporating high tech tracking and verification, as are voluntary markets.

The private-sector roadmap from the Taskforce on Scaling Voluntary Carbon Markets published yesterday is here: https://www.iif.com/tsvcm/Main-Page/Publications/ID/4496/Taskforce-on-Scaling-Voluntary-Carbon-Markets-Publishes-Roadmap-for-Strengthening-Market-Integrity

See also my next point and the previous point.

Number 4. Low Prices Mean the Carbon Credits Are Dodgy. Not Always True.

“A lot of us had to sell really cheap (back in 2013-2014). I just had to do that because of the simple fact market just wouldn’t buy my credits,” said VNV’s Choudhury at the IETA event. “The same credit today is worth seven times that price” (so VNV and its stakeholders didn’t receive fair reward for effort put in).

Now, the best-case scenario seems to be that Glasgow agrees a UN rulebook for carbon markets and accounting, which really means a framework — another year or two at least of negotiations will probably be needed to get the UN infrastructure in place, Choudhury said by phone.

Each project would probably take at least five years to get started under that system. The private sector could do it in one or two years. There’s now simply no time to wait for the UN, he said. (The world is seeking to cut emissions by half by 2030, remember.)

Number 5. Lack of Demand is the Big Problem. Not Really.

While there’s been a lack of demand in the past, the big problem really is the lack of supply of carbon credits. Global greenhouse gas emissions are about 52 billion tons per year of carbon dioxide equivalent. The voluntary carbon market is about 90 million tons. That’s 0.2% of the world total. A statistical pinprick.

The world needs to invest $23 trillion between 2017 and 2030, according Rebecca Self, director of sustainable finance at South Pole, which develops carbon projects, citing World Economic Forum/IFC data (She was formerly at HSBC). Green bonds will be about $700 billion this year of a total $130 trillion (or much more) of total bond issuance.

See this: https://www.reuters.com/business/environment/ecb-ramps-up-its-role-tacking-climate-change-2021-07-08/

The European Central Bank unveiled a plan Thursday to take greater account of climate change in its key monetary policy decisions, the latest in a series of steps by the world’s central banks to acknowledge their role in curbing the climate crisis, Reuters reported.

“So when I think about all these big numbers and where finance is most needed, I see lots of gaps. Financial markets are famously short term. There’s huge monetary values attached to nano seconds (eg high-frequency trading) … patient capital can be quite challenging to come across,” Self said.

Carbon markets are already working, rules are being put in place and they will be for years into the future, Self said. “I’m personally very optimistic. In short (there’s) progress, but a lot more to do” and expect some failures. Collaboration will be key, she said.

The emerging world has waited about 30 years for the carbon markets to increase demand for their solutions, so developing countries can play their part in the climate solution as the rich wreck their climate. The poor want to be financially rewarded for being part of the solution. The waiting needs to stop, just like the rulemaking needs to reach some kind of initial crescendo, because the rules will continue to evolve every year from now on.

Number 6. Supply will take years to ramp up. It doesn’t have to.

If the Glasgow climate talks give the private voluntary carbon sector the conditional OK to create carbon credits for the next 15 years or so, hundreds of thousands of projects could be created very quickly under carbon credit supply contracts running for that sort of timeframe.

This certainly does not currently seem to be a plan under the Paris talks. Is it really too late?

Careful structuring of a voluntary carbon purchase agreements can be implemented to take care of risks over the 15 or so years of a contract. Multilateral development banks can help with credit risks, political risks. Increasingly, so can private banks, pension funds, and even hedge funds.

VNV’s Choudhury cited an example where he missed out on a deal because the buyer wanted a guarantee that the host country would adjust its Paris NDC target to make the carbon trade work, if needed. VNV didn’t get the deal.

“That’s a typical example of what I call toxic behaviour of buyers,” Korthuis said. “By pursuing needless complexity, buyers see risks where there are none – or at least not relevant – and stay away from investing in an otherwise perfectly fine emission-reduction initiatives.”

Buyers don’t need to insist on this type of “corresponding adjustment” clause because it does not matter where in the world emissions are cut. It just matters that they ARE cut. And fast.

Number 7. The Private Sector Alone Can Save the Climate. I’m not Convinced.

Some people seem to be pushing for a purely private-sector solution to the climate crisis, where buying companies self regulate by only buying carbon credits in the voluntary market that have high environmental credibility. Even this “high environmental credibility” phrase, used by environmental lobby groups, is patronizing as it implies developing countries should not mess up their projects, Korthuis said.

While the reputational risks associated with buying questionable carbon credits are considerable, those risks are probably not big enough to prevent sharp practices and fraud, especially once carbon prices rise to over $50 a metric ton, which has already happened in the European Union. Voluntary carbon credits currently trade for as low as $1-$3 a ton.

That’s why UN oversight is probably needed … and it does not have to be bad or scary UN oversight. Technology can make UN oversight rely on transparency, cutting the risk of bad regulators, bloated bureaucracy or bribery.

Number 8. Voluntary Carbon Markets Will Last Forever. They Won’t.

Voluntary carbon markets focussing on avoiding emissions will probably last for 15 more years at the most. By 2035, the climate crisis will probably be so bad and carbon prices so high, greenhouse gas production will be seen as a very nasty thing indeed. By then, or before then, every ton of emissions will probably be tightly regulated by law/market rules.

See chart above.

In time, only projects that remove carbon from the atmosphere will probably be eligible for credits, said Jeremie Paul, product development manager at Pure Energi, a U.K. company seeking to create a platform for voluntary carbon removal markets/credits.

The price of removal credits could surge after the Glasgow climate talks in November, compared with the value of avoidance credits, he said.

Avoidance credits are created where a project, such as solar, avoids coal power. Removal credits remove emissions from the atmosphere. It’s a distinction that some place weight on, others don’t. There are reduction credits as well: credits that actually reduce the emissions of GHG. Examples include reducing emissions from landfills and reducing deforestation (there’s some overlap with removals).

Other people are a fan of imposing the voluntary carbon markets into developing-nation power markets a little longer, which would speed the transition away from coal. The overlapping credit types is one of the many places where carbon trading becomes super complicated.

What’s worthy of getting carbon credits will get much stricter over time. For carbon-market nerds, this is the notion of “additionality”. Only what is additional to business as usual or beyond legal requirements is worthy of a carbon credit. As I said above, it’s likely all greenhouse gas emissions will eventually become illegal.

Before that time, to reduce them governments must provide market structures to do so. Doing nothing will simply allow continued pollution records (see this month’s US gasoline record).

Should there be a major climatic event killing millions of people, carbon credit issuance may dry up very quickly indeed — no new credits will be awarded after the event, only those already in play will stay in the market — probably. This is another reason why a carbon credit stamp at the Paris/UNFCCC level is desirable — it potentially gives the world better control over the final temperature outcome in a (hopefully somewhat) democratic way.

Number 9. Environmental Lobby Groups and the Media are Great Checks and Balances in the Voluntary Carbon System. Not Always; They Are Not enough; They May Not Understand.

Better regulation is needed. Transparency alone doesn’t seem strong enough. Global oversight is probably needed, even if it can’t be completely agreed this November at the climate talks in Glasgow.

There are already examples of where green groups and the media hold bad practices to account. But with carbon prices of more than $100 now needed because of the decades of delay, the incentives for sharp practices or blatant corruption will arrive too quickly.

Emission cutting methodologies and verification rules are highly technical, requiring specialist knowledge. I doubt the media and clean lobby groups can keep up with the tricksters/fraudsters.

In the UN Clean Development Mechanism and Joint Implementation program started last century, I suspect some government bureaucrats were duped by the profiteering and (potentially at least) fraud/sharp practices.

Some green groups are even opposed to free-trade solutions to the climate crisis.

“Environmental lobby groups are the enemies of the voluntary carbon market,” said Korthuis. “Their main concern is that large corporations reduce emissions in-house and don’t go into offsetting. A large part of their strategy is about discrediting carbon projects in developing countries and discrediting certification mechanisms, making the product (carbon credits) unattractive for voluntary buyers. As a consequence, finance flows to the global South are hampered. Once again — an example of utter climate injustice. So please don’t suggest environmental lobby groups are the guardians of the voluntary carbon market. They are not. There is a problem with the suggestion that you can buy as many products as you like, as long as they are labelled climate neutral. The problem is that we consume too much in the first place. The climate-neutral claim aims to conceal that inconvenient truth.”

Here is an interesting spat from earlier this month between environmental lobby group Carbon Market Watch and Verra, which oversees some of the voluntary carbon market standards: https://verra.org/carbon-market-watch-report-on-colombian-redd-projects-contains-flawed-allegations/

Greenpeace isn’t convinced at all by the private sector’s efforts.

“I don’t think that that is a given, that a wide-open carbon market is going to be a big friend to climate justice,” Charlie Kronick, senior climate advisor at Greenpeace, said Friday by phone. Voluntary carbon markets probably won’t be able to generate enough capital quickly enough to transition the world generally or the global south in particular, he said.

A UN system is needed, separate to the voluntary carbon system, he said. Further, any extension of the existing voluntary systems needs to be capped or limited, perhaps to about 1 billion tons a year for a limited time, Kronick said.

Are environmental lobby groups to blame for the climate crisis and bad market structure, because they insist on perfection?

“(Laughs) …wow…look …I’ve been doing this for about 30 years, so I guess we’re to blame. It’s partially down to me,” he said (I think sarcastically). “No. I don’t think the NGOs (non-government organisations) are (to blame). They are not a unified voice. There are some people who think that under no conditions can markets deliver a kind of just outcome and there are people who think the markets are the only way to deliver it. That is horseracing. That is the human condition. That is politics. Are NGOs and civil society to blame for the failure to set meaningful carbon targets with enforceable milestones. No.

“We see no evidence that the market as it’s functioned in the past is delivering the outcomes that people are promising for the future. There should be a clear separation between the voluntary carbon market and the compliance markets in article 6.”

Number 10. Poor Countries Have Lower Standards Than Richer Ones. The Opposite May Become True.

Carbon trading theory suggests poor nations will be suppliers of carbon credits to richer countries, where emissions are highest and who are most to blame for the climate crisis. As noted above, such a structure will help solve climate injustice. But the world is brutal and rich people grab opportunities and money.

Rich-country companies are right now making inflated claims about being climate neutral, because they use questionable practices and/or don’t include all the emissions contained in the production and use of the products they sell. The suppliers of carbon credits in poorer countries are being tainted by these exaggerated claims. “The claim is where the audience takes offence,” said Climate Focus’s Korthuis.

“The problem on the side of the buyers is a problem on the side of the buyers — it’s not a problem on the side of supply. If you have a problem on the side of the buyers, on the demand side, solve it there. Solve it where the problem lies, in the exaggerators’ claims.”

People need to rethink the vocabulary they use when talking about the carbon markets, as well as the pro-demand-side assumptions they make.

As certifier Gold Standard said earlier this year: Companies can credibly use voluntary carbon markets within the context of ambitious climate plans without claiming to offset their emissions. The predominant narrative to date has focused on how the two objectives of credible claims and maximized mitigation investment should be reflected in a future approach to ‘offsetting’. What has too often been overlooked is the fact that both can be met without compromise through a different approach to the market: one that emphasizes the financing of climate action rather than the offsetting of emissions. Link: https://www.goldstandard.org/blog-item/claims-credibility-embracing-diversification-scale-carbon-markets

See also this from November: https://carrzee.org/2020/11/10/three-ways-to-add-credibility-to-the-fragile-market-for-emission-credits/

The trick is construct the market incentives to make it best for supplying countries to obey the rules and create credible carbon credits, preferably in my opinion with a Paris UNFCCC stamp (Glasgow stamp?). On the flipside tone down the “I’m carbon neutral” claims. If a company or country is part of a carbon-credit transaction where there are exaggerated claims or fraudulent behavior, buyers of credits may look elsewhere and consumers of products will turn to companies with higher standards.

Clever countries hosting emission-cutting projects are already picking and choosing who they will accept as investors. That’s increasingly happening because the levels of patient capital are on the rise, Choudhury said. They don’t want to do anything that might curb their climate finance.

Good climate/carbon market behavior and financial incentives can be aligned. It’s already happening in part. It’s just not happening anywhere near fast enough.

Here’s an optimistic scenario for how Article 6 markets might replace, or merge with, voluntary markets — giving them more credibility and confidence and attracting more of the world’s capital. It shows supply of or use of emission credits produced under 6.2 and 6.4 of the Paris deal, vs voluntary carbon markets, assuming a surprisingly strong UN deal in Glasgow in November (only governments wanting to use article 6 markets need to do so — it won’t be mandatory):

Alternative Credit Supply/Use Scenario

Carrzee &friends (see top chart for some explanation). Voluntary carbon markets switch into 6.4 of Paris, taking advantage of the UN stamp. Again, I’m not saying this is a likely scenario. I’m presenting it chiefly to show what’s at stake and to get policymakers and investors to think about what might be possible.



(Adds second chart; Comments, suggestions, complaints my way to mathewncarr@gmail.com. More to come)

NOTES:
IETA link: https://www.ieta.org/page-19157
WEF link: https://www.weforum.org/agenda/2017/01/unlocking-23-trillion-of-climate-investment-opportunities-is-mission-possible/


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Photo by Johannes Havn on Pexels.com

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