Reining in the carbon cowboys

by Lionel Fretz, Carbon Capital Markets

Lionel Fretz, is the CEO of Carbon Capital Markets.

CCM is an FSA regulated, integrated player in the carbon markets. CCM works with local sustainable development charities to ensure the widest possible benefits from the projects it is involved with.

The recent media attention on the carbon markets has shone a welcome spotlight on the current significant faults in the system, not least of which is the provision of dubious offsets by so–called “Carbon Cowboys.”

However, if properly regulated by the Financial Services Authority, carbon markets can help deliver the emissions reductions required to limit climate change, and promote sustainable development in developing countries.

The offset issues have their explanation in the background to the Kyoto agreement, and can be best illustrated in the case of forestry. In the run up to Kyoto, the Clean Development Mechanism (CDM) – the Kyoto market mechanism whereby carbon credits are created in the developing world and sold to the developed world – was originally proposed to be a fund; it was even for a time called the “clean development fund”, as proposed by Brazil.

Its purpose was to enable the flow of capital and technology to developing countries to enable them to provide clean energy infrastructure for local sustainable development. There is therefore an expectation amongst policy makers, governments, and NGOs that this is what the CDM should deliver.

Forestry, although clearly mentioned in the Protocol and a sector with definite sustainable development benefits, was kicked into the long grass. The critics’ arguments are perfectly valid, namely that it is impossible to ensure that by preserving one area, loggers do not move elsewhere and, that the forest can burn down, die or otherwise be destroyed, thus re–releasing CO2.

Because of the strict limitations of the Kyoto mechanisms, we now have a subset of the carbon market that does not fit within the strict parameters of Kyoto, but which has been taken up by the voluntary offset sector. The same applies to smaller scale, sometimes village–level activities where the cost of compliance with Kyoto (certifiers, validators, consultants, etc) is prohibitive.

Yet, we should still welcome the highly significant move by individuals and corporations to take voluntary action to offset some or all of their emissions. It does not seem reasonable to constrain the realm of offsetting activities to only those that comply with the CDM. This excludes, for example the entire USA, a country we are trying to encourage into reducing emissions.

Provided that we are happy to welcome voluntary activities, the key issue becomes one of consumer confidence in the product. There are allegations of “Carbon Cowboys” selling, or even selling several times over, non–existent credits. The solution here, as in all matters of consumer confidence, is in the regulation of offset providers or sellers. Proper regulation of these companies would give consumers confidence that there is a suitable and transparent audit trail, that their investment (for example in tree planting, solar panels for villagers etc) has been properly incurred, and not multi sold. The natural regulator for the sale of such products is the Financial Services Authority, as they already regulate most of the emissions trading market players in the UK.

The UK Government, the Corporation of the City of London and many others have striven, and succeeded, to make London the global centre for carbon trading. The FSA should go this extra yard to ensure the integrity and behaviour of offset providers.

This could also help weed out those equally unscrupulous projects, such as refrigerant gas and nitrous oxide destruction, which do fall into the official market, but which deliver very little in terms of the wider objectives of the CDM.

The private sector has a long history of initially outwitting policy makers. This can be seen clearly in the over–allocation of allowances in the first phase of the EU Emissions Trading Scheme. But, the wheels of policymaking grind slowly on, and there is no doubt that the constraints on CO2 emissions will get tighter, the market will work better, and the rules will get clearer.

All the companies and industries that supported emissions trading as an economic tool, supported it because it is, and has been proven to be, better than a tax. It is therefore too early to reverse that argument. What we are seeing are teething problems in the growth stage of a new market. They should be seen as such and dealt with to give both the carbon market and consumers of offsets greater confidence. Policy makers and regulators should take the steps needed to cure the current faults in the carbon market, and ensure that it delivers its twin aims of reducing emissions and contributing to clean development in the developing world.