The carbon market delusion
A market-first mindset obscures the economic tools that matter
When you’re a hammer, everything looks like a nail. That’s certainly true for me and some others in or from the public relations world, where we tend to see every issue as a communications issue. Judging from a day at Singapore’s clunkily named Ecosperity and GenZero conferences, held during Singapore’s version of Climate Week, it’s even more true for the finance crowd: the climate problem is a finance problem, and finance is the solution.
Borne of long experience, we communicators are usually quick to distinguish between a communications problem (a CEO publicly lamenting how a crisis is affecting his personal life, for example) and a problem problem, like when an explosion on your oil rig kills 11 people and threatens an entire coastal ecosystem.
Our friends in finance don’t seem troubled by this kind of distinction. Whatever the question, finance and markets are the answer. The role of government policy and regulation is to create the conditions for finance to do its thing, then get the heck out of the way, even when finance has repeatedly failed to do the minimum asked of it.
Carbon markets are an instructive example. Over the past two decades, a whole industry built around carbon credits and offsets has emerged, based on the idea that companies that struggle to meet their net zero commitments can offset their own emissions by buying credits in projects such as reforestation or avoided reforestation.
The approach sounds neat, but the reality has been far more challenging. Many carbon credits haven’t represented real, additional, or permanent emissions reductions. Oversight has often been weak, and standards inconsistent. Most fundamentally, the system has allowed companies to delay cutting their own emissions, leading critics to view carbon markets as too often a licence to pollute rather than a driver of genuine climate action.
So, it’s not surprising that voluntary carbon markets – as distinct from government mandated schemes like the EU’s Emissions Trading System – have struggled. Estimates vary widely, but the total market for voluntary carbon credits is no more than US$10 billion – a drop in the ocean compared with the estimated $7 trillion needed each year to meet the Paris Agreement climate targets.
But the finance guys persist. Following the launch of yet another coalition aimed at addressing carbon markets’ inherent weaknesses and aggregating demand and supply, one GenZero conference panelist summed up the broader ambition: “Get the scheme right and capital will flow, and abatement [i.e. lower emissions] will follow.”
When you’re in finance, whatever the problem, markets are the solution. Even, it seems, when markets are the problem.
In economic terms, the issue at the heart of the climate challenge is that the damage caused by carbon pollution is not reflected in the price of carbon-intensive goods and services. This is, in the jargon, a negative externality. In other words, the very definition of a market failure.
The most recognised solution to this failure is carbon pricing, but not in the way the finance guys usually use the term. Where carbon market supporters see a carbon price as simply the outcome of corporate demand for offsets and supply of suitable projects, the economist sees carbon pricing as a mechanism to drive systemwide action.
When the cost of carbon pollution is priced into every product and service according to its carbon intensity, consumers have financial incentive to choose the cleaner options. Businesses are rewarded for burning less carbon, and the financial returns for investors in clean technology and energy are transformed.
The climate finance crowd thus puts the market cart before the economic horse. It’s not about raising money for climate action, although that can certainly be a side benefit. It’s about changing consumer, corporate and (critically) investor behaviour on a massive scale.
The issue here isn’t that voluntary carbon markets are inherently bad. In fact, there are many reasons to believe that their supporters are taking meaningful steps to address the system’s weaknesses and make progress towards meeting its potential. The problem is that the finance industry’s narrow, market-oriented conception of carbon pricing – coupled with its considerable capacity for self-promotion – gets in the way of a broader discussion about carbon pricing’s true economic role.
The result is that during a day of high-level climate discussion and high-profile speakers at Asia’s pre-eminent climate event, macroeconomic solutions to the climate crisis didn’t get a look-in. That’s a missed opportunity at best, and a disappointing omission from those in the climate community who should know better. Climate policy needs economics, not just capital.