Climate imperative: Transparency could rescue America’s carbon market

Companies have far less control, however, of their ‘Scope 3’ emissions, those generated by suppliers and customers.
Companies have far less control, however, of their ‘Scope 3’ emissions, those generated by suppliers and customers.

Summary

  • This is one market failure that needs to be resolved urgently, as the Biden administration is trying. Let transparency fight greenwashing to pit market forces against global warming.

The problem of climate change cannot be solved without capitalism. Governments have tried for more than three decades with little to show for it. And while more of them are now engaging partners in the private sector, the world is still lagging in deploying the full power of the market. An announcement by the Joe Biden administration in the US could help change that by beginning a much-needed overhaul of the market for carbon credits.

Global investment in clean energy has accelerated but is far below what’s required to restrain rising temperatures. Governments will not make up that difference on their own. Private capital will be needed, and while businesses and investors are eager to provide it, a market failure in one crucial area—carbon credits—is keeping them on the sidelines.

Carbon credits, which are bought and sold in a voluntary carbon market, offer companies and investors many ways to reduce greenhouse-gas emissions. In addition to helping finance new clean-energy installations, these credits can drive capital to projects with high upfront costs and high potential rewards, such as scaling up green hydrogen technology. They can also play a role in funding reforestation and ecological preservation, as well as financing the early retirement of coal plants.

Also read: Climate action: Clean energy needs an active carbon market

There is enormous potential demand for carbon credits. Many business leaders recognize that tackling climate change is in their companies’ self-interest and are setting ambitious decarbonization goals. That is not altruism. It’s capitalism.

Companies have far less control, however, of their ‘Scope 3’ emissions, those generated by suppliers and customers. Letting firms buys credits against these emissions—but only after they disclose and begin implementing robust plans aligned with the Paris Agreement—could dramatically increase demand for them. For the demand side of the market to function, however, supply side problems must be fixed. 

Right now, the market for credits is opaque and riddled with inefficiency. Buyers can’t be sure which credits are credible, projects often don’t deliver what they promise and sellers can’t be held accountable. Lack of transparency also opens the door for greenwashing, where companies claim to be making a much bigger difference than they are, which fuels public scepticism about [private efforts].

Also read: US to Advance Carbon Offset Standards to Prevent Greenwashing

As a result, the market for carbon credits is much smaller and far less useful than it should be. Many of us have long been sceptical of it, and for good reason. As with any market, opacity breeds not only inefficacy but also corruption.

This is a market failure we can fix, and we should treat it like any other market failure. For instance, when banks collapsed and the stock market melted down in 2007, the world didn’t walk away from markets and banking. Governments worked to address some of the causes of the crisis, including requiring more transparency of opaque securities like credit default swaps and collateralized debt obligations. A similar remedy is needed for carbon credits.

Transparency works. Bloomberg’s story is a testament to that. When we created Bloomberg in 1981, there was virtually no way for firms (especially smaller ones) to negotiate bond prices with sellers, because sellers had all the information. Prices were inflated, commissions were enormous and the market was inefficient. By creating real-time bond pricing and making it available to buyers and sellers, we helped level the playing field and allowed more capital to flow to productive assets, benefiting investors and driving economic growth.

For markets to work well, they must be transparent, trusted and standardized— three qualities that have largely eluded the market for carbon credits. But change is coming. The US has released a policy statement and set of principles for building more transparent, responsible and effective voluntary carbon markets. It’s an important step that builds on work led by the Integrity Council for the Voluntary Carbon Market and the Voluntary Carbon Markets Integrity Initiative.

Also read: The EU is planning clear emission-capture norms for its carbon market

Together, these efforts can do for the carbon market what the Bloomberg Terminal helped do for the bond market in the 1980s. Through transparency and standardization, we can generate more trust that these investments are sound, turning a relatively small market into an enormous one, and a relatively inefficient one into a powerhouse. 

This way, we can unleash the market power that we desperately need on our side in this fight. Encouraging other nations to join should be a priority for the Biden administration, including at November’s G20 summit in Rio de Janeiro.

Fixing the carbon-credit market won’t solve the climate crisis on its own, but it will go a long way towards enlisting the market in the fight. ©bloomberg

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