Carbon Markets in the Post-Cop Era
History and How It All Works
The term carbon market was likely to have been uttered by every attendee at Cop26, but why is this area of such significance? Why have governments and large businesses invested so much time and money into demonstrating their support for such schemes, when the reality fails to live up to the green and sustainable utopia that carbon markets are supposed to help achieve? To answer such questions, we must trace the roots of carbon markets and analyse how they grow.
The seeds for carbon markets were sewn during the 1992 Kyoto protocol and were swiftly conceptualised into a new experiment in carbon funds by The World Bank Groups to evidence a market for trading carbon and mitigating climate change in the process. What was initially believed to be a breakthrough in carbon offsetting and emissions reductions has however resulted in unintended effects that are something akin to climbing ivy running up a building, as whilst the ivy appears attractive on the outside, the damage underneath remains largely hidden from the public eye. Just as ivy causes the mortar holding bricks together to crumble, the impacts upon our polar ice caps that result from insufficiently effective initiatives such as carbon offsetting do likewise and the true extent of the damage being conducted fails to be recognised in time. Yet it's not all doom and gloom, just as ivy can be trained to grow in a certain direction and will thrive within the correct environment so too can the carbon market. In order to identify how to achieve this necessary aim, we need to understand how the market works.
In the 1980's the American government struggled with reducing large scale industrial pollution and needed to find a way to force companies to pay for their excessive emissions and in 1990 a system called cap and trade was introduced. This gave rise to the post-Kyoto carbon markets that sprung up in pockets across the world who took the cap and trade system and ran with it recognising its clear business potential. As governments set caps on the permitted emissions levels of specific industries carbon permits were split across various firms for a price. If a company does not use its complete allowance within its related timeframe it has the option to sell what it doesn't require to those who need an increased number of permits to legally cover their emissions levels, year upon year each industry’s emissions cap is supposed to be reduced, thereby, impacting the availability of spare carbon permits and causing each permit to become more expensive. This should have sparked a race to reduce costs and maximise profits by increasing sustainability and selling on carbon permits, yet the opposite has occurred and carbon emissions unfortunately continue to climb.
For those companies looking to participate in the carbon market there are two options for conducting business, which are via the voluntary and compliance markets. The voluntary market is where small brokerages and consultancies sell the carbon credits generated by climate-friendly projects (primarily based in the developing world). The buyers of these credits do so due to either a current inability to reduce their greenhouse gas emissions, or to greenwash their carbon emissions, in order to appear ethical to consumers. By purchasing credits, they can offset their emissions and in theory reduce their net carbon footprint. The compliance market works in a similar way to the voluntary market; however, it is highly regulated by national, regional or global programmes i.e. the UN's Clean Development Mechanism and the EU Emissions Trading System. According to the World Bank there are now 61 such carbon pricing initiatives in place or scheduled for implementation (The Economist, 2021).
Cop and Carbon
Carbon markets have been continually utilised at climate conferences as an essential part of their strategy for sustainability and climate change mitigation. It is therefore no surprise that this was an area of particular interest during Cop26 and why after six years of often emotive engagement the attending nations which attended the Glasgow Summit finally struck a deal on article 6 of the Paris Agreement concerning international carbon markets.
A number of adjustments were made to the Paris Agreement during Cop26, most crucially the limiting of CDM credit (UN Clean Development Mechanism) carry over from pre-2020 to 120 million mt. The use of carry over credits are also limited to the first cycle of national commitments. The decision to allow credits to be carried forward has been questioned for its impact on the stability of current carbon costs; however, eligible carbon credit and nature-based credits have increased in cost by 944% and 181% respectively (Watson, 2021). Whilst at first glance this may appear to be some kind of adverse inflation it is actually essential to the success of carbon markets and protection of the environment that prices increase significantly, which will in-turn drive industries towards sustainability. For the time being their presence appears not to have negatively impacted the market.
There are a number of Cop26 final agreements which will impact the carbon markets on a national level, including;
● a country hosting an emissions reduction project can decide if the reductions will be counted towards its own target or sold elsewhere for other purposes, and the country must notify a UN supervisory board accordingly.
● voluntary emissions reductions may only be used towards a country's Nationally Determined Contribution if they are authorised by the UN, and the host country must apply a corresponding adjustment for any units sold abroad. This measure avoids one emissions reduction being counted by two countries. (Watson, 2021)
These two areas of the agreement will ensure that countries can control their choices on the carbon market and that developing nations, particularly those from the global south, will not be dictated to by more developed nations. In fact, on this platform, they may be able to exert more power and influence than they would usually be afforded in traditional global politics.
Finally, a so-called Share of Proceeds has been developed in the form of fixed tariffs aimed at generating funds for climate adaptation in developing countries. Set at a fixed rate of 5% of all emissions reductions, the ruling will be applied to all voluntary emissions credits. Thus, far the negotiators were unwilling to apply this tariff to national transfers and countries are encouraged to contribute to the Adaptation Fund instead (Watson, 2021).
How Do Carbon Markets Benefit Businesses and Governments?
For those business owners or investors with a nose for an opportunity the Carbon markets offer a chance to be on the right side of the climate crisis, resulting in both enhanced credentials and profitability. In just three years the carbon markets have grown in value from c.$300 million in 2018 to $800 million this year, driven by numerous companies setting voluntary carbon targets (Delivering High-Integrity, Inclusive Voluntary Carbon Markets for 1.5C - UN Climate Change Conference (COP26) at the SEC – Glasgow 2021, 2021). Whilst such business-related decisions are made by the organisations themselves it is also heavily influenced by increasing numbers of ethical consumers whose demand or lack thereof for certain products or services have impacted both new and existing businesses. It can no longer be taken for granted that consumers will purchase a product due solely to seeing the brand name. Today people ask purchase related questions that are directly linked to their aspiration to be 'environmentally aware' such as "Is this product Fairtrade?... Are these fruits and vegetables organic?... Is this diamond ethical?... Should I buy an electric car instead of diesel?... Is this company genuinely green or do their investments say otherwise?".
By harnessing the power of social media, pro-environmental consumption has blossomed. As social media algorithms target online shoppers by showing others buying eco-friendly products there has been a resultant 65% increase in consumers purchasing at least one sustainable product (White, Hardisty and Habib, 2021). As social creatures, humans will make decisions based on word of mouth recommendations in some cases word of tweet, meaning that the more readily accessible information is regarding a company and its sustainable choices the more likely a business will be able to attract the illusive green consumer. Participating in carbon markets allows businesses the opportunity to offset their carbon emissions, invest in green projects, and advertise their ethical status to their customers thereby benefiting from the boom in eco-friendly online shoppers. Partly due to Cop26 and the increased demand for company-wide transparency, when it comes to carbon emissions, carbon offsets have soared in popularity with estimates that trading in the units could top $1bn by December 2021 (Hodgson, 2021). This demonstrates the efficiency of achieving social change through both traditional channels as well as utilising social media and online shopping.
All this was previously achievable in a time when the carbon markets were unregulated, fragmented and the pricing at best...opaque. The breakthroughs attained at Cop26 will hopefully resolve many of the issues associated with the markets and “critically for business, the rules of Article 6 are now in place, providing a framework to enable immediate operationalising of global carbon markets,” said John Connor, chief executive of Australia’s Carbon Market Institute (Hodgson, 2021). By ensuring an ease of use and global regulations that ensure equality on both sides of the market, consumers will no longer buy the excuses of complications and confusion, instead they will be expecting a change in the way many companies operate.
Much the same can be said for governments whose historic antipathy towards making agreements for which they can be held accountable have led to years of disorganised carbon markets and its continued use as a method of greenwashing. Even when governments were keen to use emissions trading schemes that are paired with a carbon borders tax the difficulties of implementation and carbon leakage have made the system of carbon markets difficult to utilise. Cop26 has reversed this and governments the world over will be expected to play their part in restricting the carbon emissions of big industry and ensuring that the original aims of the carbon markets which could truly benefit the climate, are seen through to fruition. The benefits of all this change are admittedly initially hard to see as governments risk souring relations with core industries and upsetting lobbyists and political benefactors. However, there is light at the end of that particular tunnel due to the ability to use carbon markets to strengthen international relationships with key trading partners as well as developing economies in the global south. By investing in climate mitigation and ensuring sustainable development in such regions and countries the nations of the global north will be able to reduce the inflow of climate migrants by stabilising the production of food and natural resources, which enables worldwide economies to support their own populations. By playing a part in the innovations of the global south, governments and businesses will be able to benefit from breakthroughs and inventions which will help their own nations and peoples to cope with the impacts of climate change. Naturally, the importance of carbon offsetting by planting trees, rewilding areas etc. are of significance and will help to balance the production of carbon, however, governments and businesses work in terms of monetary benefits and the carbon markets can be advantageous if utilised correctly.
Carbon Greenwashing or Driver of Sustainability
So, if businesses can simply purchase carbon credits without concerning themselves with the real-world implications of their destructive behaviour, how can we ensure that these markets don't simply become another tool for greenwashing? How can we guarantee that the new carbon agreements from Cop26 will drive sustainability and push industries towards a more climate friendly future? Are carbon markets even a long-term solution or are they a temporary distraction whilst companies and governments innovate and find ways to reduce their carbon emissions?
As environmental risk moves up the corporate agenda the voluntary market is set to grow with the backing of people such as Mark Carney (former Bank of England governor) who recently launched a global task force with the aim to scale up the voluntary market (Hook and Nauman, 2021), (Gross, 2021). Running alongside this the Science-Based Targets Initiative campaigns for more rigorous carbon targets and has chosen to include carbon offsets for the first time in their guidance for companies to achieve net-zero carbon emissions (Gross, 2021). Whether this was done in recognition of the current difficulties in achieving net-zero without some form of offsetting is unclear however, what is clear is that continued attempts to bring larger industries into the eco-friendly fold requires some degree of compromise and that is what the carbon market offers… a compromise. With the markets compared to the Papal Indulgences of the middle-age, companies can absolve themselves of environmental guilt by paying hefty sums without ever needing to fundamentally change their behaviour (Gross, 2021). This supposed balance between climate protection and continued development allows companies and the general populace to 'make believe' that once net-zero is reached a business is eco-friendly even when it continues to bleed natural resources dry whilst releasing plumes of carbon and smog into the atmosphere. Let us not forget that carbon is not the only by product of large industry and that whilst you can plant 100,000 trees none will absorb or convert the poisonous fumes that are produced by burning fossil fuels and manufacturing goods. If companies decide against taking meaningful, effective action and minimising impacts of carbon emissions, they can always move abroad where they are able to avoid the expenses of the carbon markets/permits and enjoy the lower environmental standards of their chosen nation. Such issues have fed into the VCMs lack of credibility. By questioning the legitimacy and transparency of corporate claims, where the integrity of carbon credits are at best inconsistent, the market will continue to easily fall into the bracket of greenwashing.
For many companies the choice to participate in voluntary markets has led to other challenging issues as offset projects are approved without having to provide a high level of assurance that they will reduce emissions. Therefore, well-intentioned companies can invest in carbon offsetting and find themselves supporting schemes that don't achieve what they proclaim to and only offset a portion of the emissions produced by said company. "In reality, the conditions an offset project needs to meet to actually capture a given amount of carbon are very stringent...the maths has to be perfect, [but] there are instances where it doesn't all add up, " says Badgley (fellow in forest ecology at Columbia University in the US) (Gerretsen, 2021). Offsetting programmes such as those in California which generated between 20-39 million credits but failed to achieve real carbon savings according to Carbon Plan end up losing their integrity (Gerretsen, 2021) and unfortunately this does not bode well for the markets or the organisations whose mission it is to protect the environment while accepting such credits. The abysmal environmental and human rights records of markets such as the CDM have left a bitter taste in the mouths of market users and create concern to this day. Many projects "have not been clean for the environment and have violated human rights,'' says Erika Lennon (senior attorney at the Centre for International Environmental Law) (Gerretsen, 2021). Note that she also highlighted the fact that project developers failed to consult with local communities or gain their consent.
Though it appears that some companies are utilising carbon markets for less than ethical reasons there is still a significant amount of investment flowing into climate mitigation and sustainable development in regions which cannot afford to address such issues themselves. The wealth generated through carbon markets could deliver countless benefits to biodiversity, climate mitigation, sustainable economic development and uplifting Indigenous Peoples and Local Communities (IPLCs). Detractors will highlight the challenges the voluntary carbon market faces in supporting the 1.5C transition whilst proponents will argue that post-Cop26 the carbon markets have become far more inclusive and put developing countries in the driver's seat when it comes to setting terms and ensuring equality between all participants. If companies want to be able to display their eco-friendly credentials they will now need to work closely with partners in the developing world to ensure that happens. There will also need to be complete transparency on both sides where carbon production and offset is measured as accurately as possible to achieve and maintain the balance necessary make the entire system work. Those projects chosen for long-term carbon offsetting such as permanent carbon sequestration by forests must not be put at risk of logging. These forever-wild projects are some of the most effective and can offset carbon for decades (Gerretsen, 2021). These means of reducing levels and impacts of carbon do not however mean that industries can or should continue emitting at the same level, but carbon markets could (and should) buy them time to change their ways.
Thoughts For The Future
So, what happens next for those companies who are currently involved in the carbon markets or think that now is the time to engage with them? Will the carbon markets be an effective means to procure a sustainable future for big industries and the people who rely on them, or will the 'initiative' remain an inefficient contributor to the climate crisis? Carbon markets cannot become a so-called 'get out clause' for emitters who seek to fly the green flag without making the necessary effort to change their behaviours and make tangible strides towards achieving a net-zero balance that doesn't rely entirely on offsetting. We also cannot labour under the illusion that all businesses and governments genuinely wish to change their behaviours whilst it remains easier to continue leaching the planet of its natural resources and ignoring the resultant problems until they are too late to resolve. Cop26 has inspired waves of pledges from major oil and airline companies, which have created a domino effect of green schemes initiated that promise emissions reductions (Green and Chilukuri, 2021), (Dyson, 2021); however, it is not yet clear if these are genuine attempts at delivering timely solutions or simply publicity stunts designed to minimise frictions and maximise profitability. We must hope that the new strategies and policies put in place at Cop26 which have inspired these pledges will hopefully strengthen the carbon market sector, as whole countries can use these schemes to meet national goals for carbon neutrality.
In theory, these newly reformed markets should be honest, transparent and regulated in such a way where no country or company is able to take advantage of the system. Developing nations should have an equal say in the running of related day to day affairs and projects are monitored to ensure that they are offsetting the carbon they proclaim to. However, businesses and governments should be wary of the lobbyists from fossil fuel industries "looking to game the system and pushing the government to distort these markets in their favour" (Ambrose, 2021). If we can learn anything from politics, we should know that working to combat such behaviour will take time and resources that the markets do not yet have. While loopholes in the system still allow private projects that are not adjusted for in a country's carbon budget to sell emission reductions certificates to corporations who then claim climate neutrality (Appunn, 2021), we can see how easy it is to lose track of carbon emissions and fail to measure if they are being equally offset elsewhere.
The reality of the matter is that the current carbon market system, even with the additional regulations put in place at Cop26, is not a long-term solution to the climate crisis. Whether we have the markets or not, they will always be a moot point when it comes to the climate crisis as there appears to be only two paths to currently follow - do nothing and induce a climate catastrophe by using the markets to hide behind technical details and not reducing a single tonne of CO2 - or face reality and use the markets, purely in the short term (5-10 years) whilst investing heavily in sustainable development practises. In the process of this transition the costs of carbon emissions per tonne must increase, as should the fines for exceeding the quotas. We must halt all opportunities for carbon leakage by pushing nations with lax carbon emissions policies to tighten their rules so that emitters will always face consequences for polluting the atmosphere no matter which country they choose to reside in. Having said that new and established companies shouldn't be afraid to take part in the carbon markets. For the time being they are a useful tool in reducing emissions whilst countries and large companies continue to invest in achieving a sustainable future for everyone. Companies and governments must keep one eye fixed firmly on the future in the complete understanding that innovation, compromise and a significant reduction in carbon emissions is the only way to tackle what is in this moment a very uncertain future for our planet.
References
● The Economist, 2021. How do carbon markets work? [video] Available at: <https://youtu.be/m5ych9oDtk0>
● Watson, F., 2021. COP26: Nations strike deal on international carbon markets at Glasgow summit. [online] Spglobal.com. Available at: <https://www.spglobal.com/platts/en/market-insights/latest-news/energy-transition/111421-cop26-nations-strike-deal-on-international-carbon-markets-at-glasgow-summit>
● UN Climate Change Conference (COP26) at the SEC – Glasgow 2021. 2021. Delivering High-Integrity, Inclusive Voluntary Carbon Markets for 1.5C - UN Climate Change Conference (COP26) at the SEC – Glasgow 2021. [online] Available at: <https://ukcop26.org/delivering-high-integrity-inclusive-voluntary-carbon-markets-for-1-5c/>
● White, K., Hardisty, D. and Habib, R., 2021. The Elusive Green Consumer. [online] Harvard Business Review. Available at: <https://hbr.org/2019/07/the-elusive-green-consumer>
● Hodgson, C., 2021. COP26 global carbon market rules pave way for emissions credits boom. [online] Ft.com. Available at: <https://www.ft.com/content/f13bce2b-8a2b-4289-9281-9c6acf34f472>
● Hook, L. and Nauman, B., 2021. Carney defends plans for carbon offset market with oversight board. [online] Ft.com. Available at: <https://www.ft.com/content/7b0d0afb-3e04-4d18-9234-a4d6fafa1233>
● Gross, A. ed., 2021. Carbon offset market progresses during coronavirus. Financial Times.
● Gerretsen, I., 2021. How trading CO2 could save the climate. [online] Bbc.com. Available at: <https://www.bbc.com/future/article/20211018-climate-change-what-is-the-global-carbon-market>
● Green, M. and Chilukuri, S., 2021. The dark secrets behind big oil’s climate pledges. [online] The Guardian. Available at: <https://www.theguardian.com/environment/2021/nov/04/dark-secrets-big-oil-climate-pledges-greenwashing>
● Dyson, M., 2021. Global aviation industry signs carbon pledge. [online] Businesstravelnewseurope.com. Available at: <https://www.businesstravelnewseurope.com/Air-Travel/Global-aviation-industry-signs-carbon-pledge>
● Ambrose, J., 2021. Polluters face price pain as global carbon trading system moves forward. [online] The Guardian. Available at: <https://www.theguardian.com/business/2021/nov/20/polluters-face-price-pain-as-global-carbon-trading-system-moves-forward>
● Appunn, K., 2021. Carbon markets – COP26 closes biggest loopholes but lacks clarity on voluntary trade. [online] Clean Energy Wire. Available at: <https://www.cleanenergywire.org/news/carbon-markets-cop26-closes-biggest-loopholes-lacks-clarity-voluntary-trade>
● Glasgow Times, 2021. Glasgow’s COP26 ‘could carry on’ for as long as two extra days [image] Available at: https://www.google.com/url?sa=i&url=https%3A%2F%2Fwww.glasgowtimes.co.uk%2Fnews%2F19708533.glasgows-cop26-could-carry-on-long-two-extra-days%2F&psig=AOvVaw0Su62Wy5-mUJfyl31JRTuW&ust=1639690783709000&source=images&cd=vfe&ved=0CAsQjRxqFwoTCMC8xKni5vQCFQAAAAAdAAAAABAD
