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Carbon markets face stiff challenges scaling up

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Carbon markets could grow to $50bn according to forecasts, but experts warn that they must overcome hurdles such as the low quality of offsets

There is still widespread scepticism that carbon markets are an effective tool in the fight against climate change despite growing hopes among their architects that a wave of net zero pledges ahead of Cop26 can supercharge demand for voluntary offset credits, climate experts have warned.

Critics argue there is simply not enough impetus for high-impact offset projects. Instead, demand comes from incumbent fossil fuel emitters who prize quantity above quality — meaning the market then ends up supplying credits for poor quality activities that do little to reduce emissions.

The Taskforce for Scaling Voluntary Carbon Markets — initiated in 2020 by Mark Carney — has recognised the need to tackle quality concerns. It announced last month the formation of a new governance body dedicated to creating a global benchmark for carbon credit standards.

Speaking at the annual Institute for International Finance conference this week, Annette Nazareth, a former commissioner at the Securities and Exchange Commission and co-chair of the new body, said transparency should be the “great disinfectant” for carbon markets.

“Markets have been held back, in many cases rightfully so, by the perception that credits and the offsets underlying them are of poor quality,” she said. “In other words, they could be used for greenwashing. We’re not going to be able to scale up these markets unless they have high integrity.”

This is likely to be easier said than done. The governance body aims to build core carbon principles and standards that can be broadly accepted and applied. But whether these will improve on existing standards remains to be seen. One recent academic study looking at the US Forest offset protocol in California found that more than 80% of credits generated were not likely to represent true emission reductions.

Market transparency

A thriving market will require much more than just standards. Nazareth said the taskforce will lay out IT infrastructure blueprints to provide the requisite market data and price transparency, and work to ensure there is enough debt and equity capital to create a liquid market.

The governance body is also aiming to include representatives from indigenous people and local communities. This could go some way towards remedying a lack of engagement with environmental NGOs.

These are ambitious tasks and critics doubt there is the political will to create a network of effective voluntary markets. But this has not stopped firms from recognising that credits can be useful — and lucrative.

US firm Bluestone announced a $500m joint venture on Tuesday that will buy timber forests and manage them more effectively. “Revenues from carbon offset sales are key to justifying the acquisition,” the firm said.

The Ecosystem Marketplace initiative expects the annual value of voluntary carbon markets to hit $1bn for the first time in 2021. Looking further afield, McKinsey estimates that demand for carbon credits could be 15 times larger by 2030, creating a market worth over $50bn.

Acknowledging the ultimate need to get companies to net zero, Nazareth said that carbon offsets could provide a way for firms to bridge the last mile. “I think to limit our ability to do that is really short-sighted,” she said. “We need every tool in the toolbox to get to net zero as quickly as possible.”

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