The takeover of carbon markets by Wall Street is dangerous for the planet
Maximising the scale of the carbon market to balance emissions with questionable carbon credits risks doing more harm than good and eventual climate catastrophe
I’ve been contemplating for a number of weeks now how to frame this, but the headline somewhat speaks for itself as to where I think the trajectory is heading. For those not steeped in the weeds on this, Mark Carney - the former Bank of England (and Canada) Governor and now UN Special Envoy for Climate Action and Finance, convened a group of his finance friends to launch the Taskforce on Scaling Voluntary Carbon Markets (TSVCM). This group includes fossil fuel financiers (Bank of America, UBS, BNP Paribas, BBVA, Goldman Sachs, DBS Bank, Standard Chartered - whose CEO chairs this effort), big fossil itself (BP, Shell, Total), and big emitters (easyJet, Dangote, Etihad, Nestle, Unilever) who would all love nothing less than a ‘get out of jail’ option in the form of cheap carbon offsets. And that’s what it looks like they’re going to get.
The theoretical background of the Taskforce is that with all the net-zero goals flying around, demand for carbon offsets is going to boom - by their assessment on the order of between 15-160x from where it is today. Now that’s a lot - and that’s assuming the foundations of the carbon markets today are solid. They’re not. Imagine building the Burj Khalifa on the foundations for a bungalow. That’s essentially what they’re trying to do with the TSVCM. The voluntary carbon offset market has not had the most robust of beginnings, categorised by a couple of decades of climate failure from the Kyoto Protocol’s Clean Development Mechanism (CDM) and subsequent REDD+ Programme, well encapsulated by this ProPublica piece. It does not look to have got much better since, illustrated by a fantastic article by Bloomberg Green which implicated the Nature Conservancy as a “dealer of meaningless carbon offsets”.
Best of all, the purveyors of the weak existing foundations certifying these carbon offset projects have not exactly wrapped themselves in gold, ironic for the ‘Gold Standard’ Protocol, alongside the American Carbon Registry who provided third-party certification for some of the meaningless carbon offsets pushed by the Nature Conservancy - both members of the TSVCM. For further insight into how Carney and Co think about this, look no further than a recent statement he made in his capacity as Head of Impact Investing for Brookfield Asset Management claiming “Brookfield is in a position today where we are net zero” in reference to all the company’s assets. And how did they manage that? “We have this enormous renewables business” suggesting “all the avoided emissions that come with that” compensates for their $600 billion portfolio which includes investments in coal and other fossil fuels. Right, then by that logic I guess we can all claim to be plant-based because we have carrots and peas with our steak. (Carney has since been forced to walk back on those comments).
Building robust carbon markets does not appear to be the priority of the Taskforce, and pushback from the climate science community after the publication of the initial recommendations of the TSVCM was soon forthcoming. This, unsurprisingly, was grounded in the Taskforce’s focus on scaling the availability of carbon offsets without first getting the carbon market house in order. Basically, build the right foundations and shift focus to improving the quality of traded credits, then worry about scaling supply to meet potential future demand. The quality problems plaguing the carbon markets are numerous. On this topic I (and the Taskforce) should defer to actual scientific experts on carbon removal i.e. not McKinsey & Company as they have, dedicated to scaling high-quality carbon removal and safe storage. One can do much worse than read the response of the Oxford University team behind The Oxford Offsetting Principles, alongside this letter jointly written by carbon removal advisory and investment firm Carbon Direct, carbon removal non-profit Carbon Plan and the UC Berkeley Carbon Trading Project in response to the Tasforce’s recommendations, as well as the long-term work and writing of Mark Trexler on this topic.
The market integrity aspect of fixing the carbon market should not be too difficult - especially with the Wall Street backing of the TSVCM effort. After all, you don’t see two people being sold the same share in a company on the equity markets, so why that is still an issue (double-counting/double-selling) in the 21st century carbon market is beyond me. Then comes much more challenging questions around additionality: would the investment produce new climate benefits or take credit for something already happening? Essentially, does the tree already exist or are you actually planting a new one with the money. Then there’s the issue of leakage: does protecting this tree from being cut down for timber cause a tree elsewhere to be cut down instead to meet demand? Finally, how permanent is the carbon removal? Are you removing CO2 with a tree (typically 10-100 years permanence), or geological storage (~10,000 years permanence). No two credits are created equally, especially when the CO2 molecule you are trying to compensate for potentially sticks around in the atmosphere for thousands of years. It doesn’t seem like the core members of the TSVCM are well positioned to address such issues, but it doesn’t look like that was ever the point.
So, what now? Personally, I would love for the climate science community to come together and form a ‘Science Taskforce’ to coalesce around standards (SOS: Scientific Offsetting Standards anyone?) which form a ‘race to the top’ carbon market environment, rather than the race to the bottom seemingly advocated by the TSVCM in terms of standards to increase scale. A Brazil sized forest is it you need to be in-line with the goals of the Paris Agreement, Shell? (Another TSVCM member). Some might argue that we are already in a flood of different standards, protocols and registries and do we really need another one. Documenting its latest carbon removal purchase, Microsoft receivied applications from projects representing 16 different registries and 45 unique protocols. This is insane. Imagine if there were dozens of different bond rating agencies for companies to go pick and choose which rating methodology best ticked their boxes. Yet it is no surprise that emerging companies focused on permanent carbon removal (Climeworks, Charm Industrial, etc) have not sought third party ‘verification’ from such protocols, nor do companies including Microsoft, Stripe or Shopify require such seals of approval to buy from such projects, recognising their poor historical track-record and questionable standards.
To another fundamental issue of the commoditisation of carbon sought by Wall Street and the TSVCM, it simply doesn’t work. This is not for lack of trying. In the 2000’s, the Head of Environmental Markets at Barclays Capital projected that “Carbon will be the world’s biggest commodity market, and it could become the world’s biggest market overall”. However, commodity markets trade fungible and highly similar products - a tonne of steel of a particular grade is a tonne of steel irrespective of whether it comes from China or the US. The same cannot be said for carbon offsets trading on a carbon market. They are highly differentiated products with varying levels of quality and certainty/permanence of the benefits they offer. A potential ‘financialisation’ model for the carbon market may be to adopt similar protocols to that of the bond market, not the commodity market. With different ‘ratings’ to differentiate bonds of varying quality, the same could be said of carbon credits offering different ratings (AAA, BBB, junk) with respect to additionality, permanence, potential for leakage and less easily quantifiable (environmental justice, etc) standards. While still open to manipulation - think sub-prime mortgage crisis - such a proposition would enable the product differentiation inherent to carbon credits and allow companies to discriminate based on quality e.g. only buy BBB rated credits and above, however this does not currently seem to be on the Taskforce’s table.
It should be no surprise that this initiative is being launched at a time when Wall Street are searching for new lines of revenue, however this exercise in delay and obfuscation should not come at the expense of the robustness of carbon markets and consequently, the state of the planet. The carbon markets should offer an efficient venue for the purchase of robust, scientifically rigorous and sufficiently permanent carbon credits to account for residual emissions after all efforts have been made to achieve decarbonisation. The TSVCM’s race to the bottom efforts to meet the multiple gigatonne scale of carbon removal necessary to limit warming to 1.5°C, before addressing the underlying issues in the carbon market, risks jeapordising the proper functioning of the market and will undermine actual efforts to remove carbon from the atmosphere, ultimately threatening the integrity of our future global environment. Prioritising science over scale is the only path to the development of a sustainable and enduring carbon market which not just lines the pockets of market participants but actually benefits the planet.
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