Carbon market fans applaud as Rome burns
The resolution of Article 6 at the UN summit will make carbon markets more dangerous, not less, argues Mark Hulbert
(Mark Hulbert, an author and longtime investment columnist, is the founder of the Hulbert Financial Digest; his Hulbert Ratings audits investment newsletter returns.)
CHAPEL HILL, N.C. (Callaway Climate Insights) — An emerging narrative in the wake of COP26 is that there was at least one issue area in which major progress was made towards mitigating climate change.
The reference is to the carbon offset market. This market, which exists under the rubric of Article 6 of the Paris Agreement, is where countries and companies can go to purchase credits to offset their greenhouse gas (GHG) emissions. These credits allow them to continue emitting GHG while nevertheless claiming progress towards meeting their carbon reduction goals.
Many defend the carbon trading market by arguing that it will ultimately play a crucial role in keeping the climate from overheating. They contend that the profit motive will attract large amounts of financing from Wall Street to invest in new and innovative carbon reduction technologies. Many of those technologies otherwise would never see the light of day, and still others would have remained too expensive.
That’s the theory. Because Article 6 up until now has been short on details, however, it’s perhaps not surprising that the market has been an utter mess. It’s not unusual for the same carbon offset to be double-counted, for example, thereby enabling polluters to emit twice as much carbon as the offset reduced in the first place — all the while claiming progress towards carbon neutrality.
That would be bad enough, of course, but as I reported in a column this summer, the majority of those carbon offsets are themselves bogus. They do not in fact represent a genuine reduction in carbon emissions. So we have had the truly depressing situation in which fictional carbon offsets are being double counted to justify even more, and very much real, GHG emissions.
One of the issues needing to be addressed by COP26 was therefore what to do with these largely fictional offsets that are currently trading in the carbon market. Some were hoping that, by wiping the slate clean, we could start all over, setting up mechanisms to only allow genuine and verifiable offsets going forward. That did not happen. As a compromise that is more aptly described as opening the floodgates, COP26 allowed any carbon offset program created since 2013 to continue to trade.
I based my column this summer on an interview with University of California at Berkeley Prof. Barbara Haya, director of the Berkeley Carbon Trading Project. I reached back out this past week to get her thoughts on whether COP26’s changes to Article 6 represented the significant improvement that its cheerleaders are claiming. Below is the transcript of my interview.
Question: Some commentators have celebrated the changes that COP26 made to Article 6 of the Paris Agreement, arguing that they represent a significant step forward in addressing climate change. Would you agree?
Haya: “No. I was horrified that negotiators decided to allow carbon offsets from the previous UN offset program to be used by countries towards their Paris Agreement targets. They allowed in credits from any project registered after 2013. We know that the bulk of them don’t truly represent genuine reductions in GHG emissions. So COP26 creates the opportunity for governments as well as corporations to continue making false emissions reduction claims. Negotiators also created a new offsetting program that looks very similar to the Kyoto Protocol’s that failed so miserably. The rules have yet to be written, but I’m not optimistic that the outcomes will be much better.
Question: When we spoke this summer, you argued that the creation of carbon offset exchanges represented a step in the wrong direction, since they don’t allow the purchaser of the credits to see what is being bought and do any due diligence to confirm that the offsets are genuine. Does COP26 address this problem?
Haya: No. Though COP26 does establish a centralized carbon market, it doesn’t address or avoid this trend with the exchanges. There has been no way up until now to trust that the offsets that trade on the exchanges are genuine, and COP26 doesn’t change that.
Question: But are exchanges inherently suspect? Or is the problem that the exchanges as currently constituted aren’t doing their jobs?
Haya: It’s all about the quality of the offsets. The offset registries aren’t doing their jobs to ensure that the offsets that they issue are genuine and of high quality. If the exchanges were to effectively trade only in credits that are likely to represent their claimed amounts of emissions reductions, then there would be very few credits to trade today.
Even if the exchanges were to filter for only the quality credits, there still is a problem with treating all credits as fully fungible. Credits are inherently different from others. For example, credits have different levels of durability. As we’ve seen in California’s wildfires, for example, some offsets have gone up in smoke. So carbon offsets can’t be completely fungible, and that runs counter to what an exchange takes for granted.
Question: It seems to me as though we shouldn’t look to the carbon trading markets to be the solution to climate change.
Haya: I would agree.
Even at these markets’ theoretical best, in which all credits are real and genuine and you can trust that countries are meeting their carbon reduction targets, then the carbon offset markets are a zero-sum game as far as the climate is concerned. That’s because the credits do nothing more than offset GHG emissions elsewhere. The net impact is zero.
In practice, of course, it’s a lot worse. Because the offsets aren’t real and genuine, then the carbon offset market has enabled more GHG emissions than would have occurred absent those markets. Carbon offsets have been a false solution.
Question: But didn’t COP26 make its new centralized carbon market better than a zero-sum game? It mandates a 2% cancelation of carbon offsets that are traded in this new market.
Haya: In theory, perhaps — though 2% is woefully inadequate. Given the overwhelming percentage of credits created since 2013 that don’t represent real emissions reductions, the climate would truly benefit only if the mandatory cancelation percentage was closer to 80%.”
The bottom line? In my column this summer about the carbon market, I drew an analogy to Nero, who fiddled while Rome burned. In the wake of COP26 I have to expand on that analogy: Not only is Rome still burning and Nero still fiddling, we now have an audience that is applauding.
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