Despite the role voluntary carbon markets are meant to play in financing climate action, the exact amount of money reaching climate projects and local communities is shrouded in mystery, while nine out of 10 intermediaries do not disclose their fees or profit margins, a new study commissioned by Carbon Market Watch reveals.
The role of intermediaries in the voluntary carbon market is increasingly coming under scrutiny. Rightly so. Last week, an investigation found that SouthPole was making millions of dollars off the back of low-quality credits that it is brokering. A few months ago, a similar piece highlighted several examples of intermediaries selling carbon credits at massive mark-ups.
And today, Carbon Market Watch has published a report which revealed that 90% of the intermediaries investigated do not disclose the exact fees they charged and/or the profit margins they made during the sale of carbon credits on the voluntary carbon market (VCM).
The extreme opacity surrounding the financial transactions involving carbon credits is very troubling because it deprives us of insight into whether voluntary carbon markets are succeeding in their declared mission of financing climate action and makes it impossible to quantify the true amount of profiteering and speculation on the part of brokers, exchanges, online resellers and the emerging craze for crypto carbon trading.
This needs to change. Buyers have been inexplicably lenient on requiring more transparency from their intermediaries. They should ask better questions to make informed purchasing decisions (see here our checklist for buyers). Project owners have so far resisted calls of increased financial transparency, yet providing information about their earnings per credit would allow buyers to target projects where the gap between what they pay and what the project owner receives is the smallest. This will ultimately benefit the project owners, by strengthening their bargaining power with intermediaries.
Dearth of data
Most participants in the VCM today are blindly repeating the established mantra according to which the carbon market is a great tool to channel finance to climate action projects. Yet there is no data anywhere measuring this, let alone confirming this unsubstantiated hypothesis. There is no data on how much finance is actually flowing to climate action through the VCM.
Not only is there little price transparency, but there is also no transparency whatsoever regarding the destination of money paid by the final buyers. This includes a complete lack of information about the amount of money that stays with intermediaries (and hence does not reach project developers or owners) as well as the money that stays as profit with project owners (and is not used to finance the actual mitigation project nor distributed back to communities through benefit sharing agreements).
Current measures of “market size” simply multiply the number of trades by estimated prices: 10 credits traded once at €10 will lead to the same market size as 1 credit traded 10 times at €10. Yet the climate impact would be 10 times lower in the first scenario.
Intermediaries have a role to play in the VCM. They help connect those with money to those that need it. In the past, they have likely had some positive impact as speculative intermediaries invested to buy very cheap credits at a moment when demand was extremely low, thus providing a lifeline to projects. But, today, these speculative intermediaries are cashing in – reselling these credits at sometimes several times the price they paid for them. While some will see this as a legitimate return on a risky investment, it is hard to simply ignore the fact that, in such cases, most of the money that companies are paying to supposedly finance climate action is actually stuffing the pockets of what are essentially financial speculators. One option for fairer deals, would be to offer a floor price to project owners, and include a mechanism to ensure that the project owner will benefit if market prices rise before the credit is used.
A discussion is urgently needed to define what is a “fair” return in the context of a market that is not simply about producing goods, but more importantly about having a positive societal and environmental impact. Today, it is impossible to have this open conversation. Information is kept secret. Most intermediaries do not disclose their fees, let alone the mark-ups applied to credit prices. The exact pathway that a credit takes, and the number of times it changes hands before being used, is unknown.
Keeping this information secret is raising justifiable suspicions about who benefits. The first step to improve trust is to improve transparency.