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The struggle for standards in the carbon offsets market

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Hello from London, where the headlines have been dominated by an alleged wave of lockdown-busting parties at the heart of government.

While the police work to ascertain the facts behind that scandal, others continue to work on a still more important puzzle: the question of how the UK will achieve its goal of reaching net-zero carbon emissions by 2050. A parliamentary report has warned this week that the country is off-track, and will remain so unless it dramatically accelerates the decarbonisation of home heating systems.

Here, as elsewhere, the increasing urgency of the climate agenda has put a growing focus on the controversial voluntary carbon offset market. The Climate Change Committee, an independent body set up to advise the government, this week launched a call for evidence on their potential long-term use in the UK.

But if an effective global market in offsets is to take shape, widely accepted international standards will prove crucial. That’s the focus of an important new organisation featured in our lead item today. Can this initiative deliver a market of high-quality offsets? Or could offsets open the door to greenwashing, and reduce pressure on companies to cut their emissions? Let us know your take at Simon Mundy

New governance body pledges quality over quantity in carbon offsets market

Annette Nazareth, co-chair of the Integrity Council for the Voluntary Carbon Market, pictured in 2006
Annette Nazareth, co-chair of the Integrity Council for the Voluntary Carbon Market © Bloomberg

“Stop greenwashing!” Greta Thunberg said as she walked out of a seminar on voluntary carbon offsets, in one of the more dramatic moments of last November’s COP26. The incident underscored the mounting controversy that has accompanied the market’s rapid growth in recent years.

In the eyes of activists like Thunberg, the market offers a cheap escape for polluters, who could use low-quality offset certificates to make false “net zero” claims even as they continue to pump carbon into the atmosphere.

It’s Annette Nazareth’s job to make sure that doesn’t happen. A former US securities regulator, Nazareth is co-chair of the Integrity Council for the Voluntary Carbon Market, a global governance body set up in September to outline clear standards for the sector. “We understand the concerns that many have raised about greenwashing,” she said.

The Integrity Council grew out of the Taskforce on Scaling Voluntary Carbon Markets, a body spearheaded by Mark Carney, former Bank of England governor, and Standard Chartered chief executive Bill Winters. For some observers, the TSVCM’s name alone was enough to raise concerns about an excessive focus on scaling up the market, and not enough on tackling quality problems. Growth is already booming — issuance topped $1bn last year — and Carney has predicted the market could be worth $100bn by 2030.

Nazareth insisted that the new council was prioritising quality over market growth. “Before we scale those markets, we have to ensure that they are high integrity.” This, she added, was likely to bring much “more realistic” pricing to a voluntary carbon market where credits have often been available for less than $5 per tonne — under a tenth of the cost of carbon permits in Europe’s regulated emissions trading system.

The council’s primary task is to set out what it’s calling Core Carbon Principles, which will set a benchmark for quality carbon credits. Nazareth said the council aimed to publish these standards in the third quarter. The body, however, is still deciding its position on some issues such as “avoidance” — credits awarded to projects that conserve forests, on the basis that they would otherwise have been partly destroyed. Such schemes are treated sceptically by many experts, and are explicitly discounted by the influential Science Based Targets initiative, but they make up the vast majority of offsets on the market.

Even before it unveils its standards, the council has faced scrutiny: there have been questions from some analysts over the involvement of companies that could profit from the offset market. Nazareth hit back against such complaints, saying that only three — BP, Standard Chartered and offset certification company Verra — of the council’s 23 seats are reserved for market participants, who she said could offer valuable practical input. “This is not some academic exercise we’re involved in,” she added.

Amid all the controversy over the offset space, few would argue against the importance of having clear and credible standards in the market. Will Nazareth’s council manage to produce a framework that wins over the doubters and sets this market on a better path? We’ll keep you updated. Simon Mundy

Why we need to be (re)shocked

In recent months I (like many people) have been harboring a guilty secret: I’m suffering from “numbers fatigue”. The sums associated with climate change — and the scale of action needed to avert global warming — are so big that they have almost lost their ability to shock me, or have any meaning.

But when I chaired a discussion this week on a recent McKinsey report that identifies the action needed to hit the world’s net-zero emissions targets, even my jaded sensibilities felt scared.

The topline calculations are alarming: McKinsey reckons that $275tn will be needed before 2050 to create a net-zero carbon emissions world at that date. This averages out to $9.2tn each year, or $3.5tn increased spending annually, which is bigger than previous estimates because it includes land-use issues alongside energy costs. Gulp.

But what is even more sobering is that McKinsey thinks the costs will need to be much bigger in early years. Double gulp. As the report notes, “$3.5tn is approximately equivalent, in 2020, to half of global corporate profits [and] one-quarter of total tax revenue”.

Can this actually happen? That was the most-asked question from the audience at the event. And since McKinsey consultants earn their living not just by measuring problems — but by offering solutions (at a price) — the event was rife with determinedly optimistic interventions. Consultants noted, for example, that the world had enough money to meet these funding needs — if it was channelled to the right places.

They also stressed that the scale of putative transformation was probably smaller than that seen during the industrial revolution. And while the transition could knock out 185mn jobs (say, in fossil fuels), it should create 200mn new jobs (in sectors such as renewable energy) — creating a 15mn gain; or so the hope goes.

Francesco Starace, chief executive officer of Enel
Francesco Starace, chief executive officer of Enel © Bloomberg

This sounds almost cheering. But a job transition of this scale will not occur smoothly. During the debate, Francesco Starace, CEO of Enel, noted that the Italian entity already faced a shortage of the workers it needed to switch to clean energy. And Mark Carney, UN climate envoy, noted that it was proving equally difficult to get the “pipes” of international finance working to move the oodles of private sector funds sitting in the developed world to the emerging markets. As Rajiv Shah of the Rockefeller Institute pointed out, the developing world’s challenges tend to be ignored in the west — even though alleviating them is critical to combat climate change. 

Given all this, it is tough to be an optimist. Which is precisely why we cannot afford number fatigue right now. Let us all hope that McKinsey keeps scaring us all; the establishment, which it represents, needs to get (re)shocked. Gillian Tett

Sarah Bloom Raskin, Joe Biden’s nominee for the top regulatory position at the Fed
Sarah Bloom Raskin, pictured, is Joe Biden’s nominee for the top regulatory position at the Fed © Bloomberg

Sarah Bloom Raskin, President Joe Biden’s nominee for the top regulatory position at the Federal Reserve, drew ire from Senate Republicans on Thursday for her previous comments about the central bank’s role in combatting global warming.

The Senate panel’s top Republican, Pat Toomey, pointed to Raskin’s writings in the Financial Times and elsewhere, and asked — essentially — if she would seek to punish heavy polluting industries while at the Fed.

Raskin did not address oil and gas companies directly, but said that “it is inappropriate for the Fed to make credit decisions and allocations based on choosing winners and losers”. Banks chose their borrowers, not the Fed, she said. “The way supervision works is by looking at risk and by looking at risk wherever it may arise.”

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Toomey sensed a flip-flop. He said that people reading Raskin’s work came to the conclusion that “you want to be allocating capital away from those industries that are generating large amounts of CO2”, he added. “I know you are saying something different here this morning but that is not what you have been saying and writing for several years now.”

The standoff shows how far the Fed is from the European Central Bank on addressing climate change risks. In November, the ECB asked banks to “urgently” improve plans to protect their businesses from climate change risk.

The biggest risks to banks came from exposure to energy companies that did not pivot to more sustainable activities and energy-intensive sectors such as aviation, the ECB said.

If Republicans retake congress later this year, a likely scenario, the Fed will need to do its climate risk work underground again, as was the case during the Trump years. Patrick Temple-West

Chart of the day

Average temperature alignment

Only 3 per cent of 4,400 assessed global companies are aligned with a future of net zero by 2050 based on their emissions reductions targets, according to research from Moody’s. The credit rating agency wrote that while there was a need for “increased corporate ambition” from companies that have yet to set targets, there must also be a continued effort to determine the validity of existing commitments. Kristen Talman

Smart read

  • When Gillian Tett watched her grandmother obsessively hoarding and reusing household goods in the 1970s, it seemed old-fashioned. Today, she writes, it would count as embracing the circular economy, an increasingly important concept within the sustainable investing space. Read more on the circular economy in our special report.

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