Climate Capitalism and Carbon Markets

Introduction

Stefan Bowen, a professor of organization and sustainability, discusses climate change, business, and carbon markets based on twenty years of research and teaching experience.

Climate Capitalism

Definition and Background

• Climate capitalism, as discussed in the book published in 2010 by Peter Neil and Matthew Patterson, refers to the reconfiguration of capitalism to address climate change.

• Companies worldwide have had to adapt to climate change, primarily through carbon markets.

Carbon Markets as a Business Engagement Tool

• Carbon markets are policy tools that enable businesses, like BP, to reduce emissions.

• BP's "net zero" strategy, along with similar strategies from other large companies (Shell, etc.), aim to publicly demonstrate action on climate change.

• BP renamed itself "Beyond Petroleum" in 2005 and acquired carbon consultancy Target Neutral.

Carbon Offsetting

How it Works

• Carbon offsetting involves companies with high emissions investing in projects that reduce emissions.

• Examples include protecting forests, planting trees, and installing cleaner cookstoves in developing countries.

Kyoto Protocol and EU ETS

• The Kyoto Protocol established mechanisms for industrialized nations to lower emissions.

• The EU Emissions Trading System (EU ETS), inaugurated in 2005, implements the Kyoto Protocol agreements.

• The EU ETS sets an emissions cap; companies exceeding the cap must buy carbon allowances or permits, while those below the cap can sell unused permits.

BP Target Neutral

• BP Target Neutral offers carbon offsetting to internal and external clients, allowing them to invest in carbon reduction projects.

• These projects not only reduce carbon emissions but also aim to have a positive social impact, contributing to communities in lower-income countries.

Economics of Carbon Trading

Ronald Coase's Influence

• The concept is rooted in economist Ronald Coase's idea of using market mechanisms to address social and environmental problems.

• In the early 1990s, the US introduced the US Sulfur Trading System to reduce sulfur emissions.

Example: Steel Plant and Fisher Folk

• A steel plant polluting a river reduces fish stock for fisher folk, creating an environmental and social problem.

• The fisher folk charge the steel plant $100$ per unit of steel produced for the pollution.

• This increases the steel plant's costs, incentivizing reduced production and pollution.

• High energy usage from fossil fuels increases costs and carbon emissions, encouraging companies to reduce their emissions.

Voluntary vs. Compliance Carbon Markets

Growth of Carbon Trading

• Since the Kyoto Protocol, there has been significant growth in carbon trading, with a distinction between voluntary and compliance markets.

• Voluntary carbon market projects include energy efficiency, waste management, agroforestry, and carbon storage in soils or forests.

Voluntary Carbon Market

• Companies invest in green projects in poorer countries, such as wind or solar power in Brazil, to offset their emissions.

• The market is projected to grow exponentially.

Compliance Markets

• Compliance markets involve companies complying with government mandates to reduce emissions.

• The Kyoto Protocol required industrialized nations to reduce emissions.

• The EU ETS is the largest global compliance market, with big emitters needing to adhere to set caps.

• The UK now runs its own emissions trading system post-Brexit.

Voluntary Markets

• Voluntary markets cover SMEs and companies not part of compliance markets but wanting to be green for various reasons (appealing to policymakers, customers, staff).

• Larger companies like BP require their supply chains to decarbonize, leading to a cascading effect.

Key Assumptions Behind Carbon Trading

Cost-Effectiveness

• Companies that can easily and cost-effectively reduce emissions will do so.

• Carbon offsetting helps companies with carbon-intensive processes stay green.

Flexibility and Innovation

• Carbon markets respond to economic fluctuations better than taxes or tariffs, promoting innovation and identifying the lowest-cost solutions for sustainability.

Global Basis

• Greenhouse gas reductions can occur anywhere since the atmosphere is shared globally.

Carbon Tax vs. Carbon Market

Debate

• Some argue a carbon tax would be easier to implement and more efficient.

Challenges of a Carbon Tax

• Harmonizing taxes globally is challenging due to political issues and trade wars.

• Companies often view taxes negatively and try to avoid them.

Carbon Market as a Carrot Approach

• Carbon markets are seen as a positive incentive compared to the negative stick approach of taxes.

Growth of Carbon Trading Exchanges

Financial Integration

• Carbon trading exchanges, like CTX Global, are growing, with financial institutions trading in carbon alongside shares and bonds.

Climate Capitalism in Action

• Despite skepticism, climate capitalism is occurring as capitalism adapts to climate change.

Criticisms of Carbon Markets

Effectiveness

• Critics argue that carbon markets have not fundamentally changed capitalism or drastically reduced emissions to meet Paris Agreement goals.

Investigations and Evidence

• Academic research, NGO reports, and journalistic investigations highlight issues with carbon credit schemes.

Guardian Investigation and Verra

Focus on Forest-Based Carbon Offsetting

• A global investigation examined forest-based carbon offsetting schemes verified by Verra, a major verification standard.

• Verra sets standards for carbon offsetting projects, ensuring credibility for companies investing in these projects.

Policy Report on Forest-Based Carbon Offsetting

REDD+ Issues

• The report investigated the UN's REDD+ forestry-based carbon offsetting scheme.

Overcrediting

• Projects often issue more credits than the actual emission reductions achieved.

Leakage

• Protecting one area may lead to increased logging or deforestation in adjacent areas, negating the overall environmental benefit.

Durability

• Forest fires and climate change impacts can destroy forests, nullifying the carbon offsets based on those projects.

Social Dimensions

• Positive social impacts on local communities are often overstated or marginal, leading to greenwashing.

Additional Criticisms and Research

Academic Papers and Case Studies

• Research papers highlight issues with carbon trading and greenwashing.

• Case studies examine how companies like EDF Energy trade in carbon and greenwash their climate responsibilities.

Overall Critique

• Carbon markets do not radically lower emissions, have methodological problems, and often fail to create positive social impacts.

Ongoing Use in Policy

• Despite criticisms, carbon market mechanisms are still present and expanding in the Paris Agreement and recent COPs.

Carbon Consultancy Business

• Companies can easily purchase voluntary offsets and claim carbon neutrality, often relying heavily on carbon offsetting.

WWF Hierarchy and Best Practices

Prioritizing Actions

• Offsetting should be the last resort after other measures have been exhausted.

Recommended Steps

1. Avoid wasted energy.

2. Improve energy efficiency.

3. Install renewable energy.

4. Change business models.

5. Work with the supply chain to reduce scope three emissions.

Insetting vs. Offsetting

• Insetting involves working with suppliers and customers to reduce emissions within the value chain.

Problem with Quick Fixes

• Companies often go straight to offsetting for a quick fix without addressing fundamental issues.

Additional Critique: Additionality

The Problem of Additionality

• Many carbon offsetting projects are not additional because they would have happened anyway.

Double Accounting

• Projects may receive funding from multiple sources, meaning the carbon savings are not truly additional.

Conclusion

Carbon markets face numerous criticisms and practical challenges, often falling short of their intended goals despite their continued prominence in climate policy.