Carbon markets could facilitate transaction of around $1trn per year by 2050, according to researchers, and asset managers will play a crucial part in the infrastructure of that system. But according to Gilles Dufrasne, policy officer at non-profit Carbon Market Watch, the investment community has a lot to learn about the best way of using these mechanisms.
Scale versus efficacy
For starters, he said, the finance sector needs to focus less on expanding the carbon credit market and more on improving its transparency and getting the money to where it matters.
“It remains a very fragmented market with nearly all of the trades [being] over the counter, so there isn’t much standardisation and it’s incredibly opaque.
“There’s no [one] marketplace where one can… find data on prices, [or on] margins of intermediaries.”
Dufrasne noted carbon credit brokers can get quite a big mark-up when selling credits.
“The big responsibility of the financial sector in general will be to increase transparency, a lot, and focus a bit more on getting money to the projects, getting money to climate action, rather than having a big market and volume.”
The issue with the sector’s current focus on increasing market transactions, Dufrasne said, is it distracts from the real challenge.
“If you trade one credit 100 times and still have the one tonne of CO2 that’s been reduced it doesn’t really matter how many times you’re trading a credit and how much volume of trades there is. What matters is how many credits the project developer at the very beginning of the chain is actually selling. Everything that happens afterwards, basically, doesn’t have any benefits for the climate.”
Dufrasne sits on the expert panel for the Integrity Council for the Voluntary Carbon Market, an independent governance body ensuring the voluntary carbon market accelerates a just transition to 1.5⁰C. The initiative was launched last year by Mark Carney and is part of the drive to standardise and increase the volume of the carbon market. It is also concerned with improving the quality of credits – coming up with quality criteria and assessing the existing projects and credits that are on the market. Dufrasne contributes to the integrity element of the initiative.
Quality and use
He described two main elements with carbon credits at this stage: their quality and how they are being used.
“A big issue is that a lot of the credits basically don’t represent a full tonne of CO2 and that the projects have an incentive to issue a lot more credit than they’re actually reducing emissions.”
Dufrasne said he believes the vast majority of projects are supporting climate action but they are tending to overstate their impact.
“Especially projects like avoided deforestation projects, which are very popular and aim to protect forest areas and claim they’re reducing deforestation. The difficulty is in knowing how much deforestation there would have been without the project.
“There’s no way to measure that because it’s this alternative world where no project is taking place and so setting the baseline defining that alternative world has been difficult and the project developers have an incentive to say, ‘Yes, there would be a lot of deforestation without my project so I’m entitled to a lot of credits.’”
He said although credits with an overstated impact are still helpful for channelling finance, they “are definitely worth a lot less than one tonne of CO2, which in a way makes them worthless because then they’re being used to compensate a full tonne of CO2 and they’re really not compensating anything.”
On the demand side, Dufrasne cited the fact companies’ decarbonisation targets can cover a relatively small proportion of their emissions. A large, carbon-intensive industrial company may make headlines with decarbonisation targets which, he said, when you look closer, only apply to their offices.
Although announcing targets is a start, Dufrasne warned of targets that could be “hugely misleading”.
“[Policymakers may] then think ‘maybe we don’t need to take so much action because all these companies are taking voluntary action’.”
Overreliance
Dufrasne also advised looking critically at the proliferation of hard-to-abate sectors.
Offsets should be used to compensate a very small share of unavoidable emissions, Dufrasne said, yet “increasingly there’s recognition in the narrative of saying, ‘yeah, we understand offsets are only for what is unabatable.’
“But it seems today every sector is hard to abate.”
In Dufrasne’s view there is an overreliance on carbon credits and “it seems pretty clear we’re not going to have enough credits to compensate all the emissions that we would still be having in 2050 if we follow the trajectory we’re on”.
The policy officer explained we need to look beyond the carbon credits and ask if there will be a sufficient quantity of negative emissions, whether natural carbon sinks or technology solutions like direct air capture.
“We shouldn’t bank on a world where we’re going to have tonnes and tonnes of negative emissions to compensate for the residual emissions that we’ll have because it’s just not very realistic.”
Ultimately, Dufrasne explained, offsetting can be useful, but it is worth remembering they are not the main goal.
“Today or in 2050 or anytime between then we could have governments tax polluters and then use the money to finance negative emissions and this is what [could] balance the remaining emissions.
“How many offsets do we need? I would say zero, we don’t need any offsets. Carbon credits can have a role in providing climate finance to some projects but they definitely come with risks as well – excessive offsetting is one of those.”
