Governments will be key to fixing the carbon credit market

Welcome back. With remarkable speed following Donald Trump’s return to office, Nato governments (except Spain) agreed this week on a massive expansion of military spending to 5 per cent of GDP. It’s quite a contrast with their far slower increase of spending on tackling climate change.

But could governments at least help to galvanise flows of private-sector money towards climate action, by breathing new life — and rigour — into the struggling carbon credit market?

CARBON CREDITS

Who will take the lead on carbon markets?

The annual UN climate talks in Bonn — a warm-up for November’s COP30 summit in Brazil — ended yesterday without meaningful progress towards the goal of mobilising $1.3tn for climate finance in developing countries.

A couple of days earlier, London hosted a smaller intergovernmental meeting that looked a little more auspicious. It was held to launch the Coalition to Grow Carbon Markets: a new initiative co-chaired by Kenya, Singapore and the UK, with backing from France, Panama and Peru. The governments aim to publish “a clear set of shared principles on the voluntary use of high-integrity carbon credits by businesses”.

The move should give a small boost to spirits in a sector that has been taking a battering. Carbon credits have been seen by many — notably Canadian Prime Minister Mark Carney — as a potentially powerful means of mobilising funds for climate action, especially in developing countries.

But the market has been ailing for several years amid concerns about whether the projects behind the credits really reduce carbon emissions as much as their developers claim.

According to a recent report by Ecosystem Marketplace, carbon credit transactions amounted to $535mn last year — down from $755mn in 2023, and $2.1bn in 2021.

Many corporate buyers have turned away over fears that shopping in this unregulated market will leave them vulnerable to greenwashing claims.

The introduction of new guidelines by the non-profit Integrity Council for the Voluntary Carbon Market has gone some way to raising standards and repairing confidence (though not without some controversy of its own). But the sector remains sub-scale. All the carbon credits sold last year claimed to offset a combined 84mn tonnes of CO₂ emissions. Compare that with last year’s global CO₂ emissions of more than 40bn tonnes.

Credits from projects that remove carbon dioxide from the atmosphere — as opposed to those that prevent or reduce emissions — are still scarcer, accounting for only 5 per cent of credits sold last year. We have gone a negligible distance towards achieving the CO₂ removals of at least 100bn tonnes that, according to the Intergovernmental Panel on Climate Change, will be needed this century.

While advocates see removal-based credits as the most scientifically sound, they’re also far more expensive. MSCI estimates that credits from engineered removal — for example, projects that process and sequester crop waste or use machines to suck CO2 from the air — have been selling this year at an average price of $350 per tonne. That compares with just $4 per tonne for credits from “avoided emission” projects, which might fund forest conservation or cleaner cookstoves in low-income countries.

What momentum there is around carbon removal has been driven primarily not by governments but by Big Tech. While Microsoft has taken a questionable approach towards calculating the emissions from its data centres’ energy usage, it deserves credit for being by far the world’s biggest purchaser of carbon removal services. Google and Stripe have also been relatively active in that market, as has JPMorgan, which announced its latest deal for carbon removal credits this week.

The government officials at Tuesday’s event spoke bullishly about the potential of the carbon credit market. If they’re serious about this, they should do more to create the conditions for its success — in terms of growth and, at least as importantly, its efficacy.

Setting out principles for corporate buyers, as the new coalition plans, would be a good start. Effective regulation of the market would be a stronger move still. The most powerful step might be integrating it with mandatory carbon pricing schemes — as in Singapore, where companies can buy carbon credits to reduce their liabilities under the national carbon tax (such a model requires a very strict approach to credit quality, to avoid giving companies a perverse incentive to continue belching carbon while buying cheap, ineffective offsets).

Last year at COP29 in Baku, countries finally reached a global agreement on the basic rule book for a carbon market under the UN’s aegis. But subsequent progress in getting that market off the ground has been limited, and concerns have been raised that it may be too open to carbon projects of doubtful quality.

Perhaps such messy outcomes are inevitable for any complex effort that must be approved by nearly 200 governments. As the consensus-based COP process sputters — and as Trump’s US administration turns its back on climate action — there are opportunities for smaller groups of nations to take the lead and set the agenda. This week’s coalition announcement is probably a harbinger of more such moves to come.

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