Ratings agencies have attracted lots of opprobrium over the past year. So launching a similar sort of business to rate projects that limit greenhouse gas emissions may seem like odd timing. Yet the rapidly growing $60 billion (Rs2.57 trillion) carbon trading market is ripe for IDEAcarbon’s plan to provide this service.
Global concern: If one wants to cut carbon dioxide output within a country, a carbon tax is the most efficient means to do so.
IDEAcarbon, which describes itself as “an independent and professional provider of ratings, research and strategic advice on carbon finance” on its website, has begun a ratings service for projects that limit greenhouse gas emissions. Projects will receive ratings ranging from AAA to D based on the likelihood of delivering projected goals. Factors such as the project’s technology, participants, design, location and openness will affect ratings.
If one wants to cut carbon dioxide output within a country, a carbon tax is the most efficient means to do so. Yet it is potentially cheaper to limit greenhouse gas emissions in poor countries than it is in rich ones. A coal-fired power plant in Sweden is probably far more efficient than one in Bulgaria or Tanzania. Since pollution crosses borders, the UN set up a system where pollution credits can be traded internationally.
Unfortunately, many projects have disappointed, or worse, been scams. For example, sugar producers received credits to use sugarcane waste as a low-emissions fuel. But some were already planning on doing so, so they shouldn’t have received credit for reducing pollution.
Independent watchdogs may square this circle. Projects that aren’t likely to deliver, or will only deliver minimal reductions, will receive low marks. Higher rated projects should be able to sell their extra pollution credits, and their more attractive economic profile means they should have an easier time attracting capital. Even better, the world receives a better bang for each buck invested in carbon reduction.
Of course, there are potential conflicts of interest. Having owners pay for ratings could give analysts an incentive to assign unduly sunny marks to projects. A bit of competition would go a long way toward keeping the market clean. And there’s probably plenty of room for more than one agency, given the market’s expected growth—the next US administration is almost certain to adopt some form of carbon trading.