In recent years, richer and poorer nations have sought better ways to share the burden of solving climate change. One tool is carbon credits, which enable companies in one part of the world to offset their greenhouse emissions by investing in conservation and renewable energy projects elsewhere.
The market for these investments is growing rapidly, but they contain risks. A recent study published in the journal Science of 18 forest preservation projects in Africa, Asia, and South America, for instance, linked just 6% of the credits bought by foreign corporations to verifiable carbon reductions.
That may now be set to change. Governments and multinational agencies are instituting a raft of new measures to improve the effectiveness of carbon credits through better transparency. So are industry, scientific, and civil society groups. The push for these reforms is coming partly from the companies and investment banks buying them. Long accused of making false environmental claims about their operations – a practice known as greenwashing – many are now demanding greater honesty and accountability in projects they fund.
“I’ve been a regulator in the United States for 21 years, and this is the first time that industry comes in and they ask for more regulation,” Christy Goldsmith Romero, commissioner of the Commodity Futures Trading Commission, told Bloomberg.
Carbon credits are financial instruments. They enable large-scale emitters to reduce their carbon footprints by saving forests or funding projects like solar farms. Each credit represents 1 ton of carbon. Companies buy credits from green projects to offset their emissions ton for ton. Most funds flow from the wealthier Global North to the Global South. Uncertainty has undermined demand. Until now, there has been little oversight or consistency in the way credits are valued, issued, or used.
Last month, the Biden administration set new requirements for what U.S. Treasury Secretary Janet Yellen called “high-integrity” carbon markets. They follow similar plans in recent months from the European Union, the United Nations, and individual governments.
The new rules and guidelines may encourage more robust investment by giving companies more confidence in the credits they buy. More importantly, they are meant to reduce corruption and greenwashing through public scrutiny.
“Transparency is a prerequisite” for solving climate change, wrote researchers at the French National Research Institute for Agriculture, Food and Environment in a paper published in Nature Sustainability in March. Accurate information on carbon trading, they note, is crucial for scientific research, honest governance, and equality for ordinary citizens.
As the global push toward a postcarbon future gathers momentum, the demand for carbon credits is growing. Morgan Stanley projects the market to increase from $2 billion in 2020 to $100 billion by 2030. That growth coincides with another trend. A report by the financial firm MCSI last month noted that corporations’ voluntary disclosure of their carbon credit trading is “already higher than is often assumed, and transparency is set to improve further.” Tom Montag, CEO of Rubicon Carbon, which is a carbon credit trader, explained why. To accelerate financing for projects to mitigate climate change, he told Bloomberg, “you need to build trust.”