In 2020, the former governor of the Bank of England, Mark Carney, announced the launch of a Task Force for scaling voluntary markets. The rationale was that volumes of emission reductions available for purchase would need to grow to between 15 and 160 times for corporations to meet their net zero goals, and that the Task Force would set out guidelines to ensure that the market thus created is credible.
The concept of paying for emission reductions has existed since the 90s. Under the Kyoto Protocol, the UNFCCC tried to build a carbon market through the Clean Development Mechanism, and by many measures, it succeeded. At its peak, carbon trading was a US$33 billion market, and it incentivized investment in several low carbon sectors. At the same time, markets have often been criticized on several counts. One of the most serious charges against carbon markets, to my mind, is the allocation of benefits.
A carbon credit represents an emission reduction compared to what would otherwise have happened. In other words, a solar plant creates emission reductions because the same electricity would otherwise have been generated by fossil fuel-based sources. Such abstraction requires the affirmation of many middlemen to ensure credibility. This includes consulting firms or auditors that apply methodologies to calculate emission reductions or act as independent auditors to confirm that the methodology was correctly applied, and investment banks that assemble portfolios of emission reductions and trade in them. The cost of retaining these firms is deducted from the carbon price itself, or is undertaken as an upfront expense by the project that generates emission reductions.
The United Nations spent years developing detailed methodologies, and an entire industry of independent auditors and carbon standards was created for carbon trading to become possible.
So what will Mark Carney’s Task Force do? The stated aim is to put in place the underlying infrastructure and standards to make carbon markets more credible. There is an inherent agency problem in the buyer deciding what constitutes a high quality carbon credit. If tax rebates could be claimed by donation to charities, should tax payers themselves certify the charities?
It is entirely likely that rulemaking being concentrated in the hands of those who stand to profit from the market would result in systems that benefit them rather than the projects. The consultation document essentially creates a parallel governance structure. Carbon markets already involve several independent entities and carbon standards. Requiring additional checks or quality certifications simply eats further into the carbon price that is finally transmitted to the project company. In other words, the incentive for investing in a low carbon project would become lower.
In 2019, even at an average price of $3/ton, 130 million tons were transacted in voluntary markets. The Stern - Stiglitz Commission suggests that CO2 emissions need to be priced at over $40 to $80 per ton by 2020 to shift investments away from high emission fuels. If corporations really want voluntary markets to grow in scale, they may perhaps benefit from taking a leaf out of their own book, and relying on market forces to respond to price signals. Committing to paying a high price per ton is the most significant and useful commitment that the Task Force could make, and will drive more entities to make the effort to participate in markets and undertake the necessary certifications to demonstrate high quality.