Compensation to $100 Billion. June 2, 2021
As net-zero commitments from companies ramp up, so does interest in
carbon offsets. It’s often the cheapest way to claim credit for
eliminating a ton of carbon dioxide, typically through a small fee to
protect forests or fund renewable energy. The company buying the
offset gets to erase emissions from its ledgers without spending far
larger sums to clean up its business.
Such is the exuberance for carbon offsets that the consultancy
McKinsey & Co. estimates a voluntary trading market like the one being
organized by two financial heavyweights, Mark Carney and Standard
Chartered CEO Bill Winters, could be worth as much as $50 billion in
2030, up from just $300 million in 2018. Carney, the former governor
of the Bank of England, has put the figure as high as $100 billion by
the end of the decade.
In an interview last month, Winters said that private-sector demand
would be enormous. “People with money” know that offsets are “likely
to have tremendous support,” he said.
That’s one reason why late last year Winters and Carney launched the
Taskforce on Scaling Voluntary Carbon Markets. The 400-plus group of
experts across industry, academia and finance are looking to produce
guidance within the next few months that will shape the global market.
But there are rifts within the closed-door taskforce, as my
colleague Jess Shankleman and I reported today. In interviews with
more than a dozen members, we found impasses over what counts as a
credible offset and who can access the market. (Bloomberg
Philanthropies has pledged funding for the initiative.)
The bullish projections for carbon offsets underscore the importance
of a reformed and unified global market as a force bringing greater
transparency and higher standards than exists today. But there are
those within the ranks of experts who worry about the severe
limitations of carbon-offset projects and want the taskforce to
address the fundamental questions that have lingered for decades.
Time is running out. Winters and Carney hope to launch a pilot market
to trade carbon offsets later this year. The expectation is for the
new market to trade a benchmark contract that, with enough buyers and
sellers, can improve price discovery for offsets. That’s how the
currently opaque process by which companies purchase offsets can
mature into something more like a recognized commodity.
Brent crude is one such benchmark contract, accounting for about 60%
of all the world’s oil traded on any given day. That doesn’t mean that
60% of the world’s oil comes from the North Sea, the source of the oil
used to create the Brent benchmark, only that most barrels of oil are
close enough in quality to be measured against the Brent standard.
West African crude tends to trade at anything from a few cents less
than Brent to a $2 discount, depending on characteristics like sulfur
content and viscosity.
There’s a lesson in this for the commodification of carbon offsets—and
a thorny problem. For a contract to be a benchmark, it needs to be a
significant share of the total market. The vast majority of the
offsets sold today cost less than $5 for each ton of carbon dioxide
removed from the atmosphere. In many cases, the price per ton can be
as low as $2. Winters has said that low-cost offsets are unlikely to
meet the high bar that the taskforce is looking to set. If the current
market is dominated by offsets that are too cheap, it could take years
before there’s enough high-quality offsets to support a benchmark
contract akin to Brent crude.
It’s likewise unclear if there will be as many buyers as needed for
enough liquidity in the market to achieve true price discovery. That’s
because groups like the widely followed Science-Based Targets
initiative, or SBTi, currently prohibit offsets for meeting short-term
corporate climate goals. SBTi has said it may allow the use of offsets
in the future for hard-to-cut emissions, such as those from air
travel, but only when there aren’t promising technological
alternatives. The issue of who can and can’t buy offsets, and for what
purpose, remains a subject of intense debate within the taskforce.
Perhaps the biggest unsolved issue is the concern that carbon offsets
won’t become as fungible a commodity as corn or copper. Trees that
store away carbon dioxide for five years before being burned in a
wildfire are providing a fundamentally different service than a ton of
the gas buried deep underground for thousands of years. Climate change
is a problem of cumulative amount of greenhouse gases in the
atmosphere, and many experts argue that the longer a ton of CO₂
can be stored away, the more valuable it should be. That might make it
hard to set a standardized price.
Even if the new market considered only offsets from trees, it might
prove vulnerable. Several
over the past year have shown that the trade in forestry offsets can
be easily gamed. “Those who have moved early to ask which offset
credits are real, are the people who learn the hardest that very of
them are real,” said Danny Cullenward, a lecturer at Stanford Law
School with an expertise in carbon removal who isn’t involved in the
taskforce. He said those involved in the market-process are at risk
of “putting the people who have stood up these programs historically
in charge of defining quality.”
The offset market, if it comes together, will be self-regulated.
That’s key to the approach put together by Carney and Winters, and
it’s even in the name: Taskforce on Scaling Voluntary Carbon Markets.
Buyers and sellers are incentivized to trade numbers on ledgers, but
how can the rules incentivize verification? Will all the offsets
trading hands in the new market truly lower greenhouse-gas emissions?
As one taskforce participant we spoke to put it: Either the taskforce
recommends the creation of a global regulator, or it risks the same
failure that has met previous attempts.
— With assistance from Jess Shankleman and Alex Longley
Akshat Rathi writes the Net Zero newsletter, which examines the
world’s race to cut emissions through the lens of business, science,
and technology. You can
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