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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a non-resident senior fellow in the Global Development and Africa Growth Initiative at the Brookings Institution
One of the thorniest talking points in climate right now is the carbon credit market. This remains a critical mechanism for funding projects that help offset greenhouse gas emissions at scale. Nevertheless, some areas — namely, the so-called voluntary credit markets — have an integrity problem, which is holding back adoption of the whole. Stakeholders can help supply a solution by moving the entire market towards a compliance-based approach.
Despite recent controversies, carbon credits continue to enjoy a bedrock of international support. Ten west African nations recently reiterated support for projects that generate carbon credits and the critical role they play in meeting climate, nature and finance needs. And several US government agencies announced the principles for high-integrity voluntary carbon markets, which aim to address some of the issues.
However, the fact remains that voluntary carbon markets are fragmented and do not have to comply with uniform global standards. This has made them uneven, hampering supply and demand. Although the principles are welcome, they should be a stepping stone towards compliance-based markets with mandatory standards.
As the impact of climate change and nature loss on our economy grows, the size of the carbon market is projected to double to $2tn by 2030. But despite these tailwinds, scaling up projects has been difficult, and many nations are still struggling to trade their first set of credits beyond small pilot projects.
Prices are important here. Today, the average price of carbon dioxide emissions is only $5 per ton. Only the EU and UK within compliance markets have average prices of over $50 per ton. The IMF estimates the equilibrium price at over $80 by 2030. There is clearly a big discrepancy between where prices are and where they need to be. Higher-quality credits will be critical.
These markets are not a losing proposition. Carbon pricing programmes now cover a quarter of global emissions, double the figure in 2015. But to meet long-term needs, they must change their governance and the administration of carbon prices. For a commodity with the potential to save the planet, it is perplexing that the administration of the clearing price is voluntary and only regulated by civil society organisations.
Authorities globally need to collaborate on a broad-based compliance system. This will help lower-income countries meet their own needs but also allow companies to do more. They also need to agree standards for projects that generate carbon credits and certification under one international body.
Policymakers must focus on turning national and corporate carbon-reduction targets into actionable plans embedded in transition strategies and underpinned by binding regulation. Carbon market revenue must accrue more benefits to local communities. An example might include carbon capture projects that boost smallholder farmers’ resilience and productivity (while also reducing methane emissions).
In this context, the World Bank’s International Development Association presents a huge opportunity. IDA provides lower-cost financing for lower-income countries at scale and is replenishing its funds this year, to the tune of over $100bn. Using this money to help developing countries plug into carbon markets could unlock a huge supply of credits, as well as demand from organisations looking for trustworthy credits to buy. Over time, this investment would have the potential to pay itself back many times over.
Carbon markets fully deserve the attention that the US government and others have given them. It is now up to policymakers globally to take the baton and implement uniform interoperable standards. The fate of our climate, our natural world and our economy depend on it.
