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  • Writer's pictureGreta Baker

Are Carbon Credits a 21st Century Gold Rush?

Back in the mid-1800s, hundreds of thousands of fortune seekers travelled across land and sea to pan for gold. Many died, few made it rich and the detrimental impact on the environment and indigenous population was significant. Is the advent of the carbon credit and carbon offsetting process going to be similarly fraught with danger, and ultimately a short-lived vehicle for reducing the impact of carbon on the earth’s atmosphere?

As the world began to understand the implications of climate risk and the impact of Greenhouse Gases (GHGs) and principally CO2 on the climate, CO2 has become a cost to some and an opportunity to others. However, the world of carbon credits and carbon offsetting has for some commentators, developed a ‘Wild West’ feel about it. The arguments for good and for evil have both been strongly made, but before we get into that, let’s be clear about what the carbon offset and carbon credit model is:

A CARBON OFFSET describes the reduction, or removal, of carbon dioxide (or occasionally another greenhouse gas such as methane) using a process that measures, tracks, and captures GHG gases to compensate for an organisation’s emissions exuded elsewhere. GHGs are captured using projects such as tree planting schemes, soil carbon improvement, renewable energy infrastructure, carbon capture programs, or community-based sustainable developments.

A CARBON CREDIT is a transferable instrument, certified by governments or independent bodies, and represents a reduction in GHG emissions of one metric tonne of CO2. These certificates represent the right to emit a set amount of carbon dioxide or the equivalent amount of another GHG.

When a business invests in a carbon offsetting project, that business will receive carbon credits. Once purchased, the buyer can ‘retire’ the credit to claim the GHG reduction. A retired carbon credit is taken off the market, meaning it cannot be traded or swapped.

This trading model, in theory at least, is well-defined and global certification regulations are improving. Therefore, why shouldn’t CO2 be a tradeable commodity that plays a major role in de-risking climate change? Here are some advantages of carbon credits:

  • AWARENESS - Carbon offsetting raises awareness around the climatic impacts of operations, and also educates and communicates the issues of climate change. More and more businesses are aware of their impact and are now prepared to act.

  • GREEN TAX - By putting a price on pollution, carbon offsetting will work as a ‘green tax’ on business. By offsetting, although currently voluntary, the price of a GHG-emitting activity is increasingly transparent, meaning consumers will look for less carbon-intensive alternatives. This changes the game in business, as organisations are pushed to compete on their sustainability performance.

  • CLIMATE LEVER - The money invested into carbon offset schemes is used to reduce emissions and support communities. In this sense, offsetting definitively acts as a climate lever.

Others believe that we have lost valuable time in the fight against climate change by relying on carbon offsetting to be a major force for good. There are claims of significant inefficiencies and even corruption within the carbon marketplace, which is of course putting potential investors off. Here are some of the cons:

  • BUSINESS AS USUAL? - Critics of carbon offsets say they allow emitters to continue to release GHGs without guilt or penalty, other than the cost of credits. There are no rules on how many offsets an organisation can use in any given year.

  • FORESTRY - Critics of forestry-based offsets say landowners that charge for submitting part of their land for carbon offsetting can still cut down another part of their forests to sell timber or allow for agriculture in what is referred to as leakage. In addition, there is a timing issue as the credit is raised at planting, but the benefit takes decades, even if all the trees successfully mature.

  • NO SINGLE GLOBAL STANDARD - There is no single globalised carbon offset standard. Instead, a handful of registries issue credits according to their specific set of criteria.

  • ETHICAL SCHEMES? - Local communities typically work with western developers and brokers to set up projects that underpin credits. Ethics can be at risk to push GHG emission reductions.

  • OPAQUE PRICING - The carbon offset market has been defined by bilateral, project-specific deals, whereby the marketing of certain projects is instrumental in determining the price of the credit. That means that a Clean Burning Cookstove project in Africa may be a very different price to a Forest Protection project in Latin America.

Considering the urgency of the climate crisis, all carbon offsetting projects are in principle a positive step. One way or another, they allow organisations to measure and mitigate their climate impact, and they direct financing flows towards projects that work to preserve the planet. Agriculture has a key role to play in GHG reduction – it currently is a big emitter, but has a huge opportunity for carbon capture. Technology innovation and investment also have a key role, but this will require a significant acceleration of support, both public and private.

The lack of standardisation means that it’s not always clear what to look for when choosing carbon credits, or how to measure their impact. As a result, some carbon offset programmes are seen as more controversial than others. It appears therefore that significantly more work needs to be done on the certification and assurance of many schemes. In my view, a small number of global standard, regulated, ‘Exchange’ organisations (like the LSE or NYSE) would clearly go a long way to ensuring that carbon credits are not a ‘flash in the pan’.

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