Dear Editor,
Sometimes markets emerge spontaneously, and generally work well, as in the case of the market of “speedboat” transport at Vreed-en-Hoop and Parkia. At other times, markets have to be designed, with credible rules that would ensure that the associated market outcomes would promote greater efficiency. The global carbon market falls into this latter category, its failure to emerge spontaneously having been the source of what Sir Nicholas Stern called the world’s biggest market failure – climate change. Creating a market for carbon involves setting a cap on the total amount of allowable carbon emissions, and the issuing of an equivalent amount of “carbon allowances” that are traded among producers according to their needs. Without a market for carbon, CO2 emissions would remain unpriced, resulting in “too much” of those activities whose production and consumption increase carbon emissions.
The trade in carbon allowances under a “cap-and-trade” system occurs in so-called “compliance” markets, while companies such as Hess that have made “net-zero” commitments acquire carbon offsets in so-called “voluntary” markets. In an article titled “4 Reasons why a Jurisdictional Approach for REDD+ Crediting is Superior to a Project Approach,” Frances Seymour, the Chair of the ART Board argued that the jurisdictional approach – granting credits for government-led large scale policies and programmes aimed at reducing/offsetting GHG emissions – was superior to the project approach, which awarded credits for emissions reductions due to projects, because the former reduced the risk of rewarding “non-additionality.” She went on to define “additionality” and to say how it could be determined: “If credited emissions reductions would have happened anyway, they are not additional and do not reflect benefits to the climate. The best way to ensure additionality is to set a conservative reference level against which performance is measured. Jurisdictional reference levels based on recent historical experience are reasonably good predictors of future trends.”
It is now widely recognised that emissions reductions – emissions that serve as the basis for the issuing of carbon offsets – could only be considered “additional” if they would not have occurred in the absence of a market for offsets that rewards initiatives, be they jurisdictional or project-based. So the question that arises is whether the High Forest Low Deforestation (HFLD) credits issued by ART represent emissions reductions that would have happened anyway, without the policies and programmes that have been put in place by regulators. The economic logic on which markets, including carbon markets, is based is relentless: If a stock, say of trees, already exists, a payment of zero will be sufficient to secure its provenance. Efficiency requires that what is rewarded by markets are valuable additions to an existing stock (of whatever) that would not be provided without payment. If it is unclear that the services being sold are “additional,” the market will attach a relatively low value to them. (In this regard, it’s important to note that the Hess purchase of Guyana’s HFLD credits were less in the nature of a market transaction than the outcome of a bilateral agreement).
The Frances Seymour article went further than this, however, and talked about the reference levels used as the basis for determining if there is any change in emissions from one period to the next. If the baseline emissions are low, then it becomes more difficult for a policy/programme/project to achieve a reduction in emissions, even if there is no question about additionality. The incentive exists, therefore, to use baselines or reference levels associated with relatively high emissions. The market would want assurances that contrived reference levels were not used to certify carbon credits. Absent those assurances, the (voluntary) carbon credit markets could become a so-called “market for lemons,” in which both high and low quality carbon credits will command a low price.
Another important design feature of the global market for carbon is the “permanence” of emissions reductions. The global market for carbon would value more highly those (additional) emissions reductions that would not later be released back into the atmosphere. In other words, the carbon credits that are purchased, say by Hess, must be sufficient to guarantee that the carbon it represents would never be released by subsequent deforestation or forest degradation and decay. Incidentally, to qualify as “real” mitigation, the additional and permanent emissions reductions should not be subject to “leakage,” whereby deforestation increases in other jurisdictions on account of stricter policies in Guyana. Avoiding leakage requires the coordinated adoption by all countries with tropical forests of similar policies and programmes that aim to reduce deforestation and forest degradation.
The lively discussion of Guyana’s carbon credits (or more correctly, offsets) will go a long way to protect the integrity of the incipient global carbon market, but in that discussion we should not expect carbon markets (compliance or voluntary) to deliver climate justice. Well functioning markets can only guarantee “efficiency.”
Yours sincerely,
Thomas B. Singh
Director
University of Guyana GREEN
Institute
& Senior Lecturer
Department of Economics
University of Guyana