World leaders attending COP26, the U.N. climate change conference in Glasgow, did ultimately manage to agree on a set of rules for regulating carbon markets. The details of the agreement, adopted by nearly 200 countries, prompted cautious celebration from some corners (many of whom see such markets as essential)—and skepticism from others (some of whom insist carbon markets could do more environmental harm than good, by allowing carbon emitters to buy offsets rather than reckon with major change).
Bruce Usher, professor of professional practice at Columbia Business School and co-director of the Tamer Center for Social Enterprise, was among those pleased to see progress – though he still believes much is still poorly understood in the broader conversations happening around carbon markets.
Before coming to Columbia Business School, Usher was CEO of EcoSecurities Group, which developed hundreds of greenhouse gas emission reduction projects in over thirty developing countries. The firms’ projects generated carbon credits that were verified by the UN under the rules of the Kyoto Protocol’s Clean Development Mechanism. EcoSecurities was acquired by JP Morgan in 2009.
In this conversation, Usher explains why it’s not necessarily a bad thing if carbon markets shift emissions from one place to another, which attributes are crucial to create an effective carbon market, and the weaknesses of these markets that still need to be addressed.
Gilbert: How do you argue for the importance of carbon markets to someone who is skeptical of their effectiveness in fighting climate change?
Usher: The big picture is that an increasing number of companies are making net-zero emissions pledges. And that’s a good start.
But companies are going to be using offsets to reach at least part of their pledges, since it's almost impossible to run a company with zero emissions. And many companies may be using a significant number of offsets. This means that whether people are supportive of offsets or critical of offsets, the reality is that – absent some miraculous new technology emerging – we're likely to see a rapid growth in this market.
And the fact is, offsets can be very effective. They're a very powerful tool, based my experience with the Kyoto Protocol and the Clean Development Mechanism (CDM), at allocating capital to reduce emissions quickly and at low cost. Which is what is needed to avoid catastrophic climate change.
But then the devil is in the details and that's where it gets really, really challenging.
Gilbert: Some are arguing that carbon markets are really only good at shifting pollution from one place to another. What’s your answer to that?
Usher: That's not a problem; it's actually a benefit.
And here's why: One of the challenges of climate change is that emissions from anywhere affect everyone, everywhere. Greenhouse gas emissions are an unusual pollutant in that way. Most pollutants are local—someone pollutes your water supply, or a smoker is sitting next to you in a restaurant and secondhand smoke affects your health. But with greenhouse gas emissions, it's completely the opposite. Emissions in China, for example, affect all of us equally, and vice versa.
As a result, reducing greenhouse gas emissions anywhere is equally beneficial to everyone, everywhere. If we reduce emissions faster in, say, China than we do in the U.S., we all benefit from it. This is a unique attribute of climate change. We often think that to be equitable, we should all be reducing emissions. But that's not actually the right way to think about it; the right way to think about it is, ‘Where can we reduce emissions the fastest, and at the lowest cost?’ Fastest, because we have a time problem—if we don't address climate change soon, we're just going to run out of time—and at lowest cost because we don't have unlimited funds. The less we spend per ton of emissions reduction, the more we can accomplish in aggregate.
That's where carbon markets are very powerful, because they direct capital quickly to the places where we can reduce emissions today at lowest cost. This is what we saw with the CDM, the market that I was involved in more than a decade ago: capital moves very quickly and very effectively to where we can do this fastest and cheapest.
Gilbert: Why is it that some of the details around how a global carbon market would work—like the need to ensure “additionality”—have received so much attention and are taking so much time to get right?
Usher: The problem is that we're only going to address climate change if we reduce emissions that weren't otherwise going to decline because some emissions reductions are already in our forecasts. We can't get to zero emissions if we're providing credit for investments that were going to happen anyway. For example, if we're putting all of our money into building wind farms that were going to get built anyway, and we're not shutting down coal plants, we're not addressing the problem.
So the challenge is to design a market that's effective at actually reducing emissions that weren't going to be reduced otherwise.
Gilbert: It seems like that could be a downside of a market mechanism: it's naturally going to look for those lowest-hanging-fruit type of opportunities.
Usher: Exactly. The players in the market will do what's in their best interest. That's the whole point of the market: each player, by doing what's in their best interest, will contribute to the whole. And again, in theory that's correct.
In reality, of course, it's hard to set the market rules so that when everybody does what’s in their best interest it actually contributes to the whole.
One of the biggest challenges is this issue of ensuring additionality: How do we know that you're doing something that wasn't going to happen anyway?
Another is the issue of leakage, and addressing the economic reasons for why emissions are happening. Consider an example of trees being cut down in a forest. Protecting forests is important; we must stop cutting down trees if we are to address climate change. You can say, if someone owns a forest and starts to cut down trees, we’ve got to stop it by offering carbon credits. Isn't that a good thing? But that person might just walk across the road and cut down a different forest, because they’re in the timber business. Or someone else cuts down trees to create agricultural land, or needs cleared land to let their cattle roam. People don't cut down trees for fun. They cut them down for economic reasons.
So if we don't change the underlying economics that are causing people to deforest, you're just shuffling the problem around. That's called leakage.
And this is where we need to be aware of climate justice. If people are cutting down forests because they’re trying to survive, they're trying to plant some crops, and now someone else is coming in and saying, ‘Don't cut down the trees! We're going to create carbon credits and pay you not to!’ Okay, but what are they going do with their lives? Where is their food going to come from? Is it an equitable arrangement?
The poorest tend to not receive all the benefits that in theory they could with carbon markets. So that's where it gets tricky. So additionality is tricky, execution's tricky, this issue of leakage is too. And then we get into the actual practicalities of measurement, verification, avoiding corruption, things like this.
Gilbert: What are some of the other attributes that an effective carbon market needs to have to truly help address climate change?
Usher: It's extremely important, in my experience, that it’s a compliance market.
There are two types of carbon markets: compliance markets and voluntary markets. In compliance markets, a government or quasi-government entity sets the rules, and, most importantly, enforces the rules. So there's a credible penalty for violating those rules.
In a voluntary market, an organization, often a nonprofit, sets the rules and enforces the rules. But mostly they have no ability to enforce the rules. Also, there are too many different voluntary markets, and the rules are all over the place. But most importantly, it's just very hard to enforce standards, especially at a global level.
If we're serious about climate change and carbon markets, they must be connected under one enforceable compliance regime. We really need one global market since, as mentioned before, reducing emissions anywhere helps address climate change everywhere.
Gilbert: Is that because, presumably, a compliance market would do much more to incentivize big steps toward solving this problem than what we’re seeing now?
Usher: Yes. Unfortunately, most incentives today are voluntary. That only takes us so far. The pledges by companies in most places are voluntary. That's nice, but when companies get to a point where they don't know how to move forward because it's too expensive or they can't keep operating their business, it's clear what their priorities will be.
So we need that market signal with the rules and enforcement set by government.
Gilbert: What else do you think is getting frequently missed, or misunderstood, in our current conversation about a global carbon market?
Usher: I think there should be acknowledgment that it's highly unlikely the initial market rules that have been hammered out will be optimal. In a market, only once trading begins do you start to see what’s working and you also start to see the problems. It's impossible to foresee everything upfront. That means you need both rigidity, in the sense that the rules need to be clear and enforceable, and some flexibility, to adapt the rules over time to optimize the market.
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