The fledgling markets where companies can voluntarily offset carbon emissions face a credibility problem and will benefit from greater input from regulators, senior supervisors told ISDA’s annual general meeting in Madrid on Wednesday.
Issuance of voluntary carbon credits topped US$1bn last year, but they remain controversial with critics saying they give companies licence to continue polluting. Even so, many argue that allowing firms to buy credits representing investment in decarbonisation projects will play a crucial role in the transition to a low-carbon economy in the coming years.
The private sector has taken the lead so far in developing industry standards for the offset market, which is projected to swell to as much as US$100bn by 2030. That has primarily occurred under the auspices of the Taskforce on Scaling Voluntary Carbon Markets launched by UN climate action and finance special envoy Mark Carney in 2020.
Rostin Behnam, chairman of the US Commodity Futures Trading Commission, said these markets will be a “critical part of the transition” and that there is “a lot of support” across the US government for the voluntary market, but he also signalled that policymakers harbour concerns.
“It does seem that there is a bit of a credibility issue in this space right now,” Behnam said at the AGM.
Behnam said there was a place for the CFTC to be involved in the development of the market, noting that carbon credits are classified as a commodity from a US legal perspective. The CFTC is set to host a summit on carbon offsets on June 2 to engage with the industry, he said.
“I do want to be a value add to that private sector initiative,” he said. “We really want this to be a public-private partnership… But I do want to think about how we can scale this market in a productive way and how we involve the CFTC to support that growth.”
Voluntary carbon credits are used by companies and other organisations to offset residual emissions after all other options have failed. Each carbon credit is equal to one tonne of reduced, removed or avoided CO2 and is retired after it is purchased.
Sacha Sadan, director of ESG at the Financial Conduct Authority, said firms will need to use offsets to get to net-zero emissions. He also highlighted credibility concerns as firms look to reduce their carbon footprint.
“There’s a lot of greenwashing out there, let’s be honest. And therefore one of the things that we need to do is get the trust back,” Sadan told the AGM.
“A lot of people really want to do this, but they’re not sure how. And I think that’s where regulation is never the leader, but it needs sometimes to produce some of the barriers,” he said.
Greenwashing?
Critics often dismiss voluntary carbon markets as greenwashing, measures that allow companies to appear to be reducing their emissions without having to take meaningful action to do so.
Bill Winters, chief executive of Standard Chartered and chair of the TSVCM, challenged those ideas and argued financial markets can be a powerful tool in the transition to a low-carbon economy.
“We all [in this room] believe fundamentally that markets can be instrumental in solving the problem, getting money from the pockets of people that are looking to do the right thing into the pockets of people that can actually get that thing done,” he said.
In response to accusations of greenwashing, “it’s our job to explain how we can make the market mechanisms safe and sound and prudent and appropriate, but also highly impactful”, he said.
Belinda Ellington, general counsel for commodities and ESG at Citigroup, said the process of transitioning is sometimes “tarred with the greenwashing brush”. However, project-based carbon credits are a way to divert investment to areas that lack financing, she said, and financial institutions are keen to foster liquidity in these markets.
“The interesting thing ... is to what extent are project-based carbon reduction systems going to become more regulated, more standard… As that increases, the integrity of this market will increase as well,” Ellington said.
Uncertainty
Some panellists welcomed the idea of greater input from the public sector in the energy transition. Claire Coustar, global head of ESG for fixed income and currencies at Deutsche Bank, said data is one area where governments and regulators could help the private sector.
“There is a critical role for governments and regulators to play in supporting the banks,” said Coustar. “They have a treasure trove of data.”
Investors, meanwhile, called for clearer guidance more broadly on the path towards lowering emissions.
“From an investor perspective, the biggest uncertainty that we have right now is [how] the world is going to get to net zero,” said Stephane Lapiquonne, head of sustainability for EMEA at BlackRock.
“Capital is here, it just needs better signposting in terms of deployment.”