OPINION: What can carbon markets learn from the US Presidential election?

Quantum Commodity Intelligence - David Antonioli is an independent advisor on climate change and was previously founding CEO of US-based carbon standard Verra.

Ever since the US election I have spent countless hours listening to pundits provide explanations for the outcome. One of the most compelling arguments I have heard is that Democrats became enamoured with the idea of government, happy to know it existed and blindly trusting its processes.

There are good examples that highlight this dynamic. One of my favourites is the story told by Rahm Emanuel, Chief of Staff to Bill Clinton and most recently the Mayor of Chicago, who wanted to build a subway station on an empty lot in Chicago. The project required an environmental impact study, but it turned out that one was not enough; three different such studies were done - one by the city, one by the state and one by the federal government.

Regulations

The same through line can be seen in arguments about how Democrats were happy to know that pieces of legislation like the Inflation Reduction Act (IRA) were passed, but turned a blind eye to fixing the morass of regulations that prevented the allocated capital from being deployed. Stories abound about how complicated it is to build new transmission lines, slowing the deployment of much needed renewable energy.

These examples illustrate how a system, built over time, with new requirements being added on top of each other, ends up being dysfunctional. While each one of these requirements might make sense on its own and within its context, in the aggregate it does not hold up. Perhaps an ironic case of the whole adding up to less than its constituent parts?

I wonder whether we are facing a similar situation in the carbon market, with an excessive focus on process and insufficient attention to outcomes. While I can see the value in many of the new requirements being brought to bear on the market, I worry that we are creating a system that is too complicated, cumbersome and costly to navigate. It's time to spend some time figuring out a better mousetrap that is better at delivering the outcomes we all want, and which in the end will be the mark of success.

So, what does better look like? A good place to start would be to streamline the approval process for new projects. The most common approach entails project-by-project approvals, which ends up being tremendously inefficient.

Why not, for instance, set out additionality upfront and at the sector level, thereby determining which activities can generate carbon credits legitimately? Key to this would be a thorough assessment of the sector in question, and the establishment of strict eligibility criteria and robust guardrails.

By doing so, project developers and investors would have a clear line of sight as to what is acceptable. In turn, this would enable capital to flow to these activities more readily, without subjecting project developers and investors to the ever-present Sword of Damocles that hangs over their heads until their projects are registered. This, by the way, is the approach adopted by the most successful compliance markets in the world - California and Australia. 

Cottage industry

One of the outcomes of the process we have established is that we have created a cottage industry of experts who know how to navigate this complex system of approvals we have created, as embodied in the Additionality Tool.

Most project descriptions read beautifully, but behind them are multiple iterations on various arguments, which is akin to taking a test multiple times. By the third time it's not hard to score 100%. It should come as no surprise that there are now AI tools that can conjure up incredibly cogent reasons for why a particular project is additional. All in all, the preparation of project descriptions has become an exercise in creative writing.

Another important improvement would entail figuring out what happens at the end of the carbon party, when the last carbon credit is sold. This has long been considered an issue that is out in the future, but there are old projects out there that have already faced this reality, or will do so soon.

The Climate Action Reserve (CAR), for example, recently was faced with the closing down of some landfill gas projects because they came to the end of their crediting period and did not have a plan to survive beyond the sale of carbon credits.

Extending crediting periods is one solution, but it masks a deeper problem, which is that we have not yet figured out how to use carbon finance as a tool to transition to a new sustainable future that does not depend on carbon finance forever.

I shudder to think about what would happen if a forest restoration or conservation project suddenly gets cut down or catches fire because there are no more revenues to pay for its protection. Without a plan to transition away from carbon finance, we in the carbon markets are playing a dangerous game that could come back to haunt us.

One potential solution is to set objectively verifiable criteria that would determine the point at which a particular innovation has achieved scale and implementation and no longer needs outside finance. For these projects, why not analyse the point at which costs have been reduced, risks have been addressed and there are enough examples in an economy that it becomes common practice?

This would require some dedicated thinking, including most likely some academic input, and would be strengthened by public consultation. In other words, we can design the carbon markets to deliver critical bridge financing that enables companies to eventually stand on their own.

Maximum effect

This type of approach may not simply be useful, but it could very well become necessary. With aid budgets being cut around the world, it is imperative that we leverage carbon finance for maximum effect. We need to be using carbon finance to build the businesses of the future and create economic opportunities. Without this vision carbon can be just a nice band-aid that will at some point fall off and expose the cut.

Projects that will need long-term support, such as forest conservation or the capture and destruction of industrial gases, also need to address the "end of the party" question, perhaps even more critically. There are solutions, however. For instance, why not work with governments or communities to encourage them to take on the responsibility of continued operation once the crediting period for projects comes to an end?

After all, the expensive capital costs have been incurred, as have those related to training technicians. Addressing this risk may not be so challenging if projects establish trust funds that get populated over time and can then be used to backstop project activities.

Carbon markets need to ensure that the very limited resources available deliver concrete results and outcomes. Without them we risk creating an ecosystem that only we can understand, and which could eventually crumble under its own weight.

We can spend our time revelling in the great system we believe we have created, or we can rethink those parts of the system that we know are not working well and redesign them so that this market has a measurable impact on climate change.