Despite their critics, both the regulatory carbon markets run by governments as well as the newer, growing voluntary market in offsets can make significant additional contributions to controlling global emissions, said panelists at the UBS Sustainable Finance Conference. But both markets face challenges in scaling operations and integrating global carbon prices.
Those who criticize carbon markets as enablers of greenwashing should revisit how the markets have matured, panelists suggested. “Critics are really taking quite a narrow view of the carbon markets and, in many ways, one that's outdated,” said Sonja Gibbs, Managing Director and Head of Sustainable Finance, Global Policy Initiatives, Institute of International Finance.
The success of the EU Emissions Trading System (EU ETS), by far the largest and most mature of the 30 compliance markets globally, has had a significant role in moving European power generation to gas from coal, noted Sam Arie, head of the UBS European Utilities team. Every megawatt hour of production moved to gas from coal saves about a half ton of CO2, he noted.
But with the curtailment of Russian gas shipments, Germany is looking at release of perhaps 10 gigawatts of coal reserves in Germany. “The focus on switching out of coal into gas is kind of turned on his head,” said Arie. “So there's a question mark about where we go short term with that.” But long-term, the focus remains on shifting away from coal.
While the EU has exported its compliance market template to regions including California, Korea, and China, it’s unlikely that a global cap-and-trade market will emerge any time soon, given the political challenges of cross-border regulation, said Ariel Perez, Managing Partner at Hartree Partners. The differences among national markets will make it difficult integrate them globally.
But other initiatives may help establish more pricing signals for carbon, Perez noted. European consideration of a border regime that would essentially force all imports to price carbon or pay a fee to the EU could be “incredibly effective” as a carbon-pricing mechanism, he said. If major economies move to legally binding net zero targets, border taxes would force industrialized nations that trade with one another to adopt a common approach to carbon pricing.
The EU border initiatives have already spurred some countries to take a closer look at carbon accounting and valuation. “If we're going to a world where the carbon price is at 100 or above,” Perez noted, “you need to have some way to equalize the border. Otherwise, what you're doing is you're taxing your domestic industry.”
Voluntary markets, which saw the total traded value of offsets rise to just over $1 billion in 2021 from $473 billion in 2020, are more likely than compliance markets to approach being global, Perez said. The total addressable opportunity for voluntary markets consists of the 80% of carbon assets not covered by the compliance market, Perez noted, and the value of price information is significant. “I can tell you that there isn't a single investment that we would be able to make in a project if we didn't know what price somebody would pay for that emission reduction or removal,” he said.
Voluntary markets are not meant to be the primary solution for fighting climate change, noted Gibbs. “Carbon markets and credits give us a complementary tool to reduce and remove emissions over and above what would otherwise be possible given the current state of technology,” she said. “Voluntary carbon markets help channel capital from wealthy mature economies responsible for the bulk of carbon emissions, to developing economies that are most impacted by climate change, and support natural capital and biodiversity.”
Scaling the voluntary carbon markets will mean strengthening governance and standardization, said Gibbs. “What's really critical here is to ensure that these markets work well and have integrity both on demand and supply side,” she said. She cited the roles of International Sustainability Standards Board, the Voluntary Carbon Markets Integrity Initiative, and other groups in strengthening market structure.
“Standardization is key,” said Gibbs. “To get good price signals, you need market depth and liquidity. And if you get these standardized reference contracts, use the core carbon principles as a benchmark, that's just going to enable companies to do this at scale. And that scale creates better price signals.”
Most of the offsets and the carbon credits traded in the voluntary market fall into the renewable energy, agriculture, forestry land use category, Gibbs noted. But the voluntary carbon market can also be a catalyst for developing technologies, bringing in new platforms and participants across the value chain of decarbonization. “That’s why it’s critical to ensure that these markets work well,” she said.
