The major flaw in carbon markets that no one is talking about. And a possible solution.
As we wake to Day 3 of COP26, carbon markets are one of the hottest topics. But among all the discussions, all of the articles, all of the presentations, there is one major flaw in carbon markets, and carbon accounting writ large, that I haven’t yet heard mentioned. And I think there might be a solution, perhaps a complex solution, but a solution nonetheless.
The Problem
Theoretically, the carbon market frameworks function such that a lower cost credit means a lower priced credit. But as with most market-based systems, what has often been the case is the lower quality the carbon credit, the cheaper the carbon credit. For any traditional product in a market-based economy, this structure makes perfect sense. A toaster made of plastic and cheap components that is built to last 6 months should be less expensive than one that is made of the highest quality metals and components made to last for 10 years. But with carbon credits, if there is more of a chance that a low quality credit has additionally, permanence or leakage issues, then shouldn’t we be paying more for that credit? Due to the risk of that credit not being additional, permanent or leading to leakage. It seems quite counter to our goal of reducing CO2 in the atmosphere if it’s cheaper for buyers to buy credits that have less of a chance of delivering a true climate mitigation outcome. And, even credits that DO meet the current standards for certification have vastly different profiles when it comes to additionally, permanence and leakage.
The approach we are taking today is to make sure all credits meet the single highest quality standard for carbon credits. But we’ve been trying to do this for the last two decades and the standards and certification system has not proven to be robust enough to ensure that all credits that are certified, meet that high standard. And furthermore, does it actually serve our climate mitigation goals to only have a single high bar as a standard that all credits must meet? Now that I hopefully have your attention with that statement :), what might an alternative look like?
One other key consideration, what happens to all of those potential credits that don’t meet that high bar? What happens to them? These are potential climate mitigation outcomes that we are leaving on the table when we need all hands (all mitigation) on deck. But we don’t want to compromise quality and robust measurement, so what can we do?
A Solution: Non-binary climate mitigation units
What would a market look like if we evolved beyond the binary credit system? Instead of having one bar that all projects must meet, what if we had a ratings framework for carbon credits that was directly correlated to the “grade” of that climate mitigation unit and was not only priced accordingly, but from an accounting perspective, was actually worth a fraction of 1 tCO2eq?
For example, let’s look at a reduced deforestation (REDD+) project in the California. Perhaps that project has permanence issues due to wildfires and there is justifiable evidence that the additionally claim is not fully robust. What if we had a ratings system that could take all of the unique characteristics of a project as inputs and output a rating of say, .3 tCO2eq? As in, this climate mitigation unit it worth .3 tCO2eq. Where the risk that the credit is not worth 1 tCO2eq is inherently built into the quantified credit value of the climate mitigation unit. This would allow buyers to purchase lower quality credits at a lower price, that still have a climate mitigation outcome, but they would have to buy many more of these units to meet their netzero ambitions.
I fully recognize that building such a ratings system, especially one that is internationally recognized and agreed upon is no small task. But as the Taskforce for Scaling Voluntary Carbon Markets is currently exploring creating such a centralized standard, why not create a system that addresses this major flaw in current market frameworks? It just might be the key to unlocking the long-tail of climate mitigation outcomes on the ground and combating the “license to pollute” that is today’s biggest critique of carbon markets.
And, for the record, I’m going to leave “co-benefits” out of this as I am a fundamental believer that co-benefits should be valued and paid for entirely outside of a carbon credit. They have their own unique values and should be treated as such.
I am sure I am not the first person to think of such a structure and would love to hear your thoughts on why this could or could not exist. We’re all in this together and I’m just hoping to productively stir the pot.
