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 one looming danger posed by the move of carbon markets from voluntary to compliance– the danger of a bubble caused by losing sight of the real source of value—we need to look no further than the recent implosion of the US housing market. That market grew at a rapid pace due in part to falsely increased housing demand supported by the ability to separate the debt from the actual housing asset, repackage the debt with other debt, and resell it in numerous creative ways (otherwise known as “securitization”). Once the mortgage debt was disassociated from the people who had taken out home loans, it was no longer the concern of those selling them the loans whether homeowners were actually going to make their mortgage payments… and oversight of those selling the loans was no longer valuable protection for banks and homeowners. Instead it turned into a weight on the otherwise booming mortgage securities market; weight that it was all too easy to do without. Ultimately, those buying the disassociated loans in this market spent no time ensuring that the reason the market existed in the first place—the homeowners—remained financially healthy. It’s as if they forgot that people do not buy houses to make bankers rich but rather to fulfill their individual desires for home ownership.
A similar enthusiasm for profit through commoditization and securitization in the carbon markets could lead to the same misplaced emphasis on the units of tradable carbon themselves rather than the source value underlying the carbon credits. And perhaps more importantly, the markets could lose sight of—or never even see—the human and ecological need and value that spurred somebody somewhere to take the action that generated that credit. Let’s illustrate this with an example from Mexico, where Grupo Ecologico Sierra Gorda has worked for over 20 years to educate the residents of an ecologically sensitive region about the impact of deforestation on the ecosystem and watershed, their own economic future, and the life that lives within the forest…. And to create alternative means of making a living. These means include forest restoration and conservation work that results in sustainable microenterprise, ecotourism and high quality carbon offsets Sierra Gorda sells on the voluntary carbon markets for money it reinvests in the work.
The fact that Sierra Gorda is restoring the natural ecosystem while ensuring a living for resident families, who create carbon offsets prized by the industrialized world, is critical. Should these offsets be disassociated from their source, it would be very easy for market fluctuations to result in a situation where the source of carbon offsets is irrelevant, only that the supply of commoditized carbon offset meets demand, thereby resulting in a loss of incentive for specific offset projects to continue. This lack of ensuring the suppliers can continue to provide their products, in turn, could have a ripple effect and lead to the same instability in the carbon markets that we’re all suffering from in the global credit markets today. And worse, the people in communities may not only lose their economic incentives to continue environmentally positive action, they would likely revert to their survival ways of short-term gain from environmental destruction.
The voluntary carbon credit markets are comprised of independent projects around the world attempting to use their carbon capture and sequestration activities as a means of achieving various additional social and environmental goals—generally some combination of economic development and biodiversity protection. Carbon offsets are merely a means of harnessing an economic incentive for environmentally positive activity. As such, these offsets are essentially “premium,” in the sense that they offer “extra” environmental and social benefits. In a commodity market, this extra value is ignored, potentially at the peril of the people and other ecosystem benefits that would have been created had this value remained in view.
Looking inside out, what the carbon markets call the social co-benefits of carbon activity are really the carbon co-benefits of poverty alleviation and biodiversity preservation. Should that value go uncounted, the market built on that value could, and we posit, eventually would see great instability. Make no mistake though, the motivation of the people doing the work on the ground is not to “create assets for trade on the global markets,” or even to slow climate change; it is to survive and thrive.
As profits from carbon’s commoditization (and by extension disassociation from its root value) increase, we run the risk of forgetting to ensure that those on whom the market rests—the homeowner equivalent, the people creating the carbon sequestration projects—remain in a position to maintain their carbon-offsetting practices. Imagine an economy where to pay their mortgages, US homeowners deconstruct their homes brick by brick and plank by plank, and sell those materials anonymously on an exchange, with little more than a certification that the bricks and planks are of high enough quality to be used in another construction project somewhere else.
The carbon markets are, and will continue to be, a great tool as they can provide clear and beneficial returns to those taking the offsetting activities. To be clear, we wholly support the evolution of the carbon markets, but they must be managed as a means to an end, an end of biodiversity protection and economic development. As the carbon markets grow, and profits are generated, we cannot lose sight of its larger purpose. Offsets are the architect’s pencil, not the architect.
This entry was originally published on the Skoll Foundation’s SocialEdge.org website on our other blog – SVT on Impact.