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Making Carbon Markets Work

Another conundrum: How much credit should countries get for emissions-reductions projects that were launched in the past, under the so-called Clean Development Mechanism, which is defunct?

Opinion Conversation The climate, and the world, are changing. What challenges will the future bring, and how should we respond to them?

No wonder expectations for a breakthrough in Scotland are low. Carsten Warnecke, a founding partner of the NewClimate Institute in Cologne, Germany, told me he’s lost faith in global trading of emissions credits as a solution to climate change. He says rich countries should focus on reducing emissions at home while giving money to poor countries to help them achieve reductions. (Under the Paris Agreement, rich countries are supposed to give $100 million a year, but they haven’t so far.)

Others share Warnecke’s pessimism. “If there are large financial flows across borders, you’re creating constituents in developing countries that depend on financial flows and will lie and cheat and do everything they can to maintain these flows,” says Gernot Wagner, a climate economist at New York University. And he says rich countries would like to save money by claiming credit for cheap, low-quality credits abroad. “It’s in nobody’s interest to enforce these rules,” he says.

Some are more hopeful. “There are clear benefits to having channels of climate finance to do things that otherwise wouldn’t happen,” says Roman Kramarchuk, head of future energy analytics for S&P Global Platts. Zack Parisa, a founder and the chief executive of Natural Capital Exchange, a forest carbon marketplace based in San Francisco, says his company has developed standards and technology to guarantee that forest protection credits are legitimate. But even Parisa says that protecting trees is only a partial fix. “We shouldn’t make the mistake of thinking forests are an infinite sponge,” he says. “They’re the ambulance ride to the hospital.”

Today there are two categories of emissions trading. There’s one mandated by governments, known as compliance markets, where countries or companies are given limits on emissions. Emitters can buy credits or allowances to cover their excess emissions and can sell credits or allowances to make some money if they’re comfortably below their ceilings. And there’s a voluntary carbon market, which is the one where companies like Delta Air Lines and JPMorgan Chase buy credits to achieve their own emission-reduction targets. Under negotiation in Glasgow is how to account for emissions trading across borders and how these efforts can count toward national targets.

I interviewed Sonja Gibbs, the head of sustainable finance at the Institute of International Finance. She said that she and others have spent the past 18 months developing rules for the voluntary carbon market as part of an organization called the Taskforce on Scaling Voluntary Carbon Markets. She’s optimistic that when it comes to emission reduction credits, there will be a race to the top in quality, not a race to the bottom. “Once you have a standard, there will be tremendous demand for it,” she says. “There won’t be demand for credits that don’t have that recognition.”

Eventually, Gibbs says, there will be a single global carbon market that combines today’s compliance and voluntary markets: “What happens at COP26 will affect how the demand for credits will evolve. If countries set more ambitious targets, there will be more demand for credits.”

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