The voluntary carbon markets are growing again, renewing our faith in humanity’s march toward meaningful climate change mitigation. Across the four main standards (Verra, Gold Standard, ACR and CAR), 75m tCO2e were issued in 2018 and over 142m in 2019 (IETA). This near doubling speaks to a renewal of climate action globally. In fact, according to MarketWatch the global Voluntary Carbon Offsets market size was USD 193.4 million in 2019 and is expected to reach USD 235.2 million by the end of 2026 (https://www.marketwatch.com/press-release/global-voluntary-carbon-offsets-market-outlook-2020-market-trends-segmentation-consumption-by-regional-data-market-growth-and-competitive-landscape-2020-06-16). Heartening, I will agree. However, lurking behind this thin veil of success is an embarrassing reality. Carbon markets are opaque and allow financial intermediaries to charge disproportionately large fees in relation to the risks undertaken. What is the cost of this opacity and will it continue unabated?

The central idea behind a carbon trading scheme is to employ the profit motive to effect meaningful climate mitigation. By establishing a price on carbon through scarcity, the market propels investor dollars to finance carbon reduction activities. Sounds like a great idea and it is… for the most part. While the plan looks great on paper, it begins to unravel as intermediaries chip away at transparency.

Developing carbon projects is arduous work. Often, promoters find themselves in remote locations pushing through red tape to secure local buy-in for their carbon projects. It may be a group distributing cookstoves into rural Africa, or, a forestry group in Asia organizing stakeholders to reverse the destruction of indigenous rainforests. Once they conquer the local landscape, they must navigate the international carbon market, where they often pay anywhere from 20-30% to brokers who add little value to the climate equation. Even electronic bulletin boards passing themselves as exchanges, which by definition should thrive on liquidity, take 10% or more to list projects and tout eliminating settlement risk alone as a massive achievement.

The above referenced issuances of 142mm tCo2 are likely to pay “market fees” north of U$200mm. This is a financial toll that diverts funds away from climate mitigating activities. It’s a cost that exists solely due to a structural lack of transparency in the voluntary carbon market. Assuming that the average cost of offsetting one ton of Co2 is U$4, this financial cost curtailed climate action by 50mm tCo2 in 2019. To put this in perspective, this equates to 826,760,587 tree seedlings grown for 10 years or, 338,235 acres of forests preserved from conversion to cropland in one year. If vehicles are your thing; it represents 10,802,178 USA passenger vehicles driven for one year! (https://www.epa.gov/energy/greenhouse-gas-equivalencies-calculator). This is a seriously onerous cost of doing business.

We have come a long way from the freewheeling days of CDM and the Kyoto Protocol. Today carbon registries are for the most part, robust arbiters of the truth. Therefore, one would assume that picking a reputable registry should be sufficient to guarantee a project’s environmental integrity. If a registry certifies that an underlying activity mitigates a specific amount of carbon emissions over and above business as usual, shouldn’t the market agree? Shouldn’t the public nature of most registration processes provide sufficient stakeholder oversight to warrant trust? So why is there a need for differentiation across projects? Afterall, isn’t a tCo2 abated a tCo2?

The answer is in the weeds. Some buyers are smitten with the optics of forestry projects, while others abhor the same projects because they come with convoluted caveats to ensure permanence. Some value location over substance. And last on my list, which is not exhaustive by any stretch, there are those that throw all caution to the wind and go for price alone. All of this is counterintuitive since the entire premise of the carbon market is to pursue the cheapest activity to save a ton of carbon first.

There is good news on the horizon. The solution is coming sooner than many may expect. More and more firms are finding it necessary to offset their carbon emissions. By default, demand for carbon credits, as evidenced by increasing trading volumes, is also on the rise. This will inevitably affect price and by extension make carbon expense an increasingly greater proportion of a company’s bottom line. In the end, offsetting carbon will no longer be a small part of a company’s marketing budget. It will migrate towards the treasury departments and earn its rightful significant line item. At this point, the aforementioned differentiation of projects will make way to pragmatic assessments of financial cost and environmental integrity. Offsets will stand on the merits of the underlying registry and inefficiencies will melt way driving more capital to where it belongs; reducing carbon emissions.