Green Finance

Carbon credits have potential…. and potential problems

  • At our current of emissions we will surpass our carbon emission limits within the decade.
  • Banks have a crucial role to play in this emerging industry of carbon offsets, but there are rising concerns about efficacy and transparency in this nascent space.

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Carbon credits have potential…. and potential problems

We are worryingly close to running out of our global “carbon budget”, which is the amount of carbon we can emit without raising the temperatures by 1.5 C. Only about 250 billion tons of carbon can be emitted without crossing this threshold. At our current rate of 54 billion tons of emissions every year, we will surpass thresholds before this decade is over. 

One method that can be used to dampen this acceleration in emissions are carbon offsets. These are tradable rights or certificates which correspond with activities that lower the amount of CO2 in the atmosphere. The funds from the purchases of carbon offsets can be put towards funding projects that fight climate change, and this method can serve as an alternative to taking individual actions that would lower carbon emissions. 

Purchases of carbon offsets are expected to hit $100 billion a year by 2030, according to Deloitte. These increases are influenced and accelerated by the embedding of carbon offset purchases in daily customer purchases.  For example, Aspiration offers digital products that enable banks, payment processors, retailers, and travel booking platforms to embed “climate action” products into their payment and checkout flows. 

“Payment services and other financial applications can give customers a greater sense of their carbon footprint with carbon calculators that either display the emissions impact of their individual purchases or track the carbon footprint attributable to their spending habits,” said Val Srinivas, banking and capital markets research leader at Deloitte. 

Moreover, these firms can also utilize third party APIs by companies like Aspiration to offer purchase options for carbon offsets, and show the impact of donations and purchases, Srinivas added. 

The role of banking in the carbon credit industry

One of the primary roles the banking industry can play in this ecosystem is the development of the bankend infrastructure that ties the carbon credit market with brands and retailers. FIs may also choose to offer options to purchase carbon credits in digital wallets. Earlier this year,  BBVA, BNP Paribas, CIBC, Standard Chartered and three other global banks invested a total of $45 million in Carbonplace, a platform that connects buyers and sellers of carbon credits through banks. 

Apart from infrastructure, banks can also communicate the impact carbon credit purchases are actually making. This includes adding visual elements to show how a customer’s decisions enable environmental benefits. Not only do these visualizations promote customers to undertake further green activities, they also introduce accountability and transparency in the processs. 

“Payment and financial services platforms can also provide benchmarking to show how a consumer’s contributions compare to similar customers who are also acting to mitigate carbon-intensive habits,” Srinivas said.

There is also the possibility of FIs contributing data and infrastructure to a market-wide public registry. This could provide further insight and transparency into the carbon credit industry. While Srinivas thinks that our priority should still be emission reduction and avoidance, a whole system view of this kind might prove to be helpful. A registry could monitor how firms complement reductions in emissions with carbon credits, as well as signal into consumer demands for specific types of sustainable projects. 

Carbon offsets and complications

There may be a bigger prerogative for building such a registry: accountability and transparency. As carbon credits have become more popular, there have been reports that  carbon offsets approved by one of the leading carbon credits certifiers, Verra, are mostly useless. More than 90% of its rainforest offset credits did not correspond to any real carbon reductions, dubbing them “phantom credits”. Verra is based in Washington DC, and has certified more than 1 billion carbon credits; its rainforest project makes up 40% of its approved credits.  Disney, Shell, and Gucci have worked with the company as part of their net-zero strategies. These reports stand to invalidate claims of having net-zero carbon emissions by these major brands.

Phantom credits are not the full extent of complications in this still developing industry. For example, credits that depend upon future climate benefits like plantation of trees are called 'ex-ante credits'. This means that organizations offer vague predictions about the amount of CO2 a sapling would remove from the environment once it grows into a tree. 

Through ex-ante credits, carbon emitted today will be removed sometime in the distant future. Planting trees is an important part of climate action, but ex-ante credits based on plantation may be antithetical to what carbon credits are meant to do. Carbon credits are meant to compensate for today’s emissions. They serve as a funding vehicle for projects that have already avoided emissions or worked to remove carbon from the atmosphere. Ex-ante credits based on plantations promise to do so in the next four or five decades, while the carbon budget we have left will run out in this decade. 

Srinivas thinks solutions to some of these problems are on the way. “There are valid concerns about the quality of some carbon credits being bought and sold in the voluntary carbon markets. The industry is working to create uniform standards for vetting and certifying carbon credits, which will alleviate many of these issues. In the meantime, offset providers can instill credibility in their services by sharing the processes they use to select carbon credits and being transparent about those projects’ attributes and credentials,” he added.

To ensure that carbon credits are actually performing as customers and brands intended, a market-wide view of the industry may prove to be invaluable. Here banks and other FIs can provide critical infrastructure and data to shed light into how and where money has flowed to fund climate action. Banks have an opportunity to play a critical role in the carbon credit industry, and the success of this strategy directly affects the pledges larger banks have made as part of their net-zero goals. Earlier this year, JPMC (one of the largest fossil fuel financiers) pledged $100 million on carbon removal credits by 2030. If carbon credits don't actually remove carbon or customers don’t trust the industry, net-zero will be more fictitious than a planet on fire. 

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