(updated 21 January 2021)
Encouraging the private sector to support climate action in developing countries is a positive objective. Carbon markets could have a role in this if implemented carefully. Markets should be used to channel finance towards impactful projects while taking care to not abusively rely on the achieved emission reductions to justify continued business-as-usual in high-carbon sectors.
The Taskforce should aim to increase the flow of investments that benefit concrete projects. This is not necessarily achieved through an increase in the volume of transactions. Therefore, the taskforce should take care to identify guardrails in order to ensure that any new provisions will truly drive climate action. There is a risk that the proposed measures will result in the creation of new investable assets that will benefit the financial sector more than the climate. This could be detrimental to climate action.
Today’s key priority is to incentivise reductions. We must ensure that voluntary carbon markets will not serve as a way to escape environmental obligations, or falsely green a company’s image. Similarly, while the world will inevitably need to increase its carbon sinks, and promote negative emissions, this cannot be a substitute for emission reductions. Many negative emission practices, in particular the so-called nature-based solutions, also cannot guarantee the permanence of the carbon storage and are linked to various environmental problems. For the above reasons, land-based mitigation activities should not be used to generate carbon offsets. These activities should be supported, including by the private sector, without claiming offsets.
Furthermore, voluntary carbon markets currently lack transparency. For a large majority of projects, it is effectively impossible to know who buys the carbon credits generated, at what price, and who are the various intermediaries who benefit financially from the transaction. Some of the taskforce’s proposals, including that of promoting “core carbon contracts” risks making the system even more opaque. Under core carbon contracts, credits could be exchanged without having clearly identified from which projects the final credits will be delivered. This is in direct opposition to the taskforce’s stated aim of improving transparency. Such a practice could also lead to the undervaluation of certain attributes, such as sustainable development benefits, which are more difficult to measure in a standardized way.
Finally, the taskforce should clearly acknowledge and seek to address the risk of double claiming of emission reductions. When companies finance climate action in a country, there is a risk that the reductions financed by the company will simply replace reductions which the host country was planning to deliver. This can happen if the host country is allowed to use the achieved reduction towards its climate target under the Paris Agreement. To mitigate the risk requires a rethink of how the market works. Ideally, the buyers of carbon credits should no longer claim that they have delivered “extra” reductions and that this can compensate for their own emissions. Instead, they should acknowledge the reality, which is that they have contributed to the host country’s climate action. Beyond semantics, this should have concrete implications inter alia for advertising practices. Alternatively, if companies continue to rely on “compensation claims”, the host countries should not count the reductions towards their own targets. Private companies will thereby export emission reductions out of a country, and force the host country to search for mitigation options elsewhere. Such practices should be considered very cautiously.