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Reviews | Making carbon markets work

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Another conundrum: How much credit should countries get for emission reduction projects that were started in the past under the clean development mechanism, which no longer exists?

Conversation of opinion
The climate and the world are changing. What will be the challenges of the future and how to respond?

No wonder expectations for a breakthrough in Scotland are low. Carsten Warnecke, founding partner of the NewClimate Institute in Cologne, Germany, told me he has lost faith in the global trade in emissions credits as a solution to climate change. He says rich countries should focus on reducing emissions at home while giving money to poor countries to help them achieve reductions. (Under the Paris Agreement, rich countries are supposed to give $ 100 billion a year, but they haven’t done so yet.)

Others share Warnecke’s pessimism. “If there are significant cross-border financial flows, you create voters in developing countries who depend on financial flows and who will lie, cheat and do whatever they can to maintain those flows,” says Gernot Wagner, climate economist at New York University. . And he says rich countries would like to save money by claiming credit for cheap, low-quality credits abroad. “No one has an interest in enforcing these rules,” he said.

Some are more optimistic. “There are clear benefits to having climate finance channels to do things that otherwise wouldn’t happen,” said Roman Kramarchuk, head of future energy analysis for S&P Global Platts. Zack Parisa, founder and CEO of Natural Capital Exchange, a San Francisco-based forest carbon marketplace, says his company has developed standards and technologies to ensure that forest protection credits are legitimate. But even Parisa says protecting trees is only a partial solution. “We shouldn’t make the mistake of thinking that forests are an endless sponge,” he says. “They’re the ambulance ride to the hospital.”

Today there are two categories of emissions trading. There is one mandated by governments, known as compliance markets, where countries or companies have emission limits imposed on them. Emitters can buy credits or allowances to cover their excess emissions and can sell credits or allowances to earn money if they are comfortably below their caps. And there is a voluntary carbon market, one where companies like Delta Air Lines and JPMorgan Chase buy credits to meet their own emission reduction targets. Negotiations in Glasgow focus on how to account for cross-border emissions trading and how these efforts can count towards national goals.

I interviewed Sonja Gibbs, responsible for sustainable finance at the Institute of International Finance. She said she and others had spent the past 18 months crafting rules for the voluntary carbon market through an organization called the Voluntary Carbon Market Scaling Task Force. She is optimistic that when it comes to emission reduction credits, there will be a race to the top in terms of quality, not a race to the bottom. “Once you have a standard, there will be a huge demand for it,” she says. “There will be no demand for credits that do not have this recognition.”

Ultimately, says Gibbs, there will be a single global carbon market that combines today’s compliance and voluntary markets: “What happens at COP26 will affect how the demand for credits evolves. If countries set more ambitious targets, there will be more demand for credits. “

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