Carbon and carbon markets are a hot topic today as the climate change reality becomes clearer. But, can we predict activity of the market and possibly avoid disaster?
Carbon markets generally fall into two categories: regulated (cap-and-trade systems, Kyoto Protocol, and often sold on an exchange) and voluntary (independent and 3rd party verified projects and often sold direct to consumers or through companies like TerraPass and others). With the increased pressures of climate change, it is no surprise that carbon trading and related offsets are quickly growing in popularity. Easy quantification of tons of carbon equivalent (CO2e), a movement toward project standardization, a regulatory market established globally under the Kyoto Protocol and an expected cap-and-trade system to come from the new administration in the US have rightfully created enthusiasm, and speculation, about the carbon markets.
While markets can be a very valuable tool in meeting certain social and environmental objectives (for example, for-profit companies now sell alternative energy, make green buildings, and generate employment), they are not well suited to predict social or environmental needs. In other words, markets can be a useful means of achieving social and environmental impact when employed to do so, but leaving markets alone to seek out and address the most pressing problems based on opportunities for profit rarely matches the greatest societal needs with profit seekers. As such, in order for carbon markets to grow and be sustained in the long term, it is important to not lose sight of why markets are being created: to compensate for environmental damage from emissions, protect biodiversity and help people who would otherwise have no choice but to destroy natural resources make a decent living.
I returned this weekend from speaking at the Voluntary Carbon Markets USA conference, an insightful two-day discussion specifically on the voluntary carbon market. Perhaps it was a coincidence that we were mere blocks from Wall Street, but the overwhelming majority of attendees were focused not so much on whether the projects underpinning the carbon offsets authentically lowered our global carbon footprint, protected biodiversity or benefited people by doing so, but rather when and if those projects would be regulated, commoditized and fungible (freely exchangeable as a discrete and interchangeable unit). In other words, when and if the offsets that are currently unregulated (voluntary) will be tradable on an exchange for profit.
The ability to benefit financially from positive environmental activities can be a great motivator (e.g. advances in clean technology, green building and ecotourism). Indeed, harnessing the profit motive to get people to reduce carbon seems like a win-win. But in commoditization there is also a danger—the danger of losing sight of the real source of value.
To understand this danger, we need to look no further than the recent implosion of the US housing market. How so?
[Cliffhanger apology…] Stay tuned for Preventing a Carbon Bubble Part II coming shortly!
This entry was originally published on the Skoll Foundation’s SocialEdge.org website on our other blog – SVT on Impact.