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In this context, how do international carbon markets, particularly voluntary carbon markets, interact with economic development, political conceptions of climate justice, and the global objective of eradicating extreme poverty?
A well-functioning international carbon market can substantially benefit low- and lower-middle-income countries. It can provide investment for efficient, low-carbon growth paths that these countries cannot otherwise afford, provide subsistence to low-income communities to prevent them from engaging in environmentally and ecologically destructive practices that would otherwise be their sole income source, and preserve ecosystems with substantial future value. And, of course, it can assist these countries to avoid the economic damage of unmitigated anthropogenic climate breakdown. However, such a market must meet certain conditions.
First, an international voluntary carbon market based on carbon offsetting is almost certain to fail to achieve climate justice. By “offsetting,” I mean a process where a Global North company aiming to construct a narrative that it is not contributing to climate breakdown—but facing high costs to eliminate its own emissions—chooses to achieve “carbon neutrality” or a “net-zero” target by buying carbon credits from a Global South developer working with a Global South community to sell a carbon abatement project through the unregulated voluntary market. The intention is to match its own emissions one for one. By buying credits, it is, in theory, preventing emissions elsewhere that are equal to its own emissions. This process typically entails buying the cheapest available credits and thus spending far less to achieve “net zero” with the CO2 reduction bought through the credits than the company would have had to spend to lower its own emissions.
The problem is that to prevent climate breakdown, we need to achieve global net-zero emissions. Even if the credits genuinely represent the reductions claimed by the developers, the Global North company, in the absence of any emissions targets other than its own “net-zero” target, is essentially absolving itself of responsibility for removing all of its own expensive-to-reduce emissions by purchasing offsets. This means that, although the company may now consider itself carbon-neutral, viewed from the global perspective, only a portion of the Global North company and Global South community’s combined cross-country emissions have been removed, and no one is willing to take responsibility for the remaining, more expensive, emissions that the Global North company continues to emit and profit from. To achieve global net zero, these remaining emissions must be removed.
To be truly good climate citizens, Global North companies that benefit from national infrastructure and wealth created through decades of intensive energy use and greenhouse gas emissions must work with Global South project developers to finance reduction pathways that lead to eventual global net zero. This requires a commitment to both finance less costly reductions in Global South countries and eventually eliminate their own, more costly to reduce, emissions.
Second, additionality—the requirement that a credit’s stated emissions reduction would not have occurred without the credit payment—remains essential. Some ecosystem-based carbon credit proponents argue that additionality becomes less important in a low-income country with considerable extreme poverty and where any income is valuable; even if a project fails to reduce emissions, the revenue from selling credits can still reduce poverty and support economic growth.
Third, even in a compliance market, carbon trading predicated on ecosystem-based carbon credits may impose substantial costs on lower-income countries. This carbon trading requires discontinuing less-profitable economic activity in the Global South in order to continue more profitable economic activity in the Global North, while adhering to a specific emissions reduction trajectory. While a Global South landowner would only accept a credit price that makes up for the direct income lost by ceasing her economic activity, supplying the credit may impose costs on her community for which the credit price alone is inadequate compensation.
For example, if deforestation enables agriculture, a landowner may be willing to halt deforestation and agriculturalization if her profits from this business can be replaced like for like by revenue from carbon credit sales. However, her business may have provided income to farm workers, which could have been spent on products and services, and taxes to the local government, which could have funded infrastructure and education. So the price the landowner is willing to accept may be lower than the cost faced by the community as a whole.
One solution could be to levy a local tax on carbon credit sales, so that the income realized by halting economic activity extends beyond the landowner who stops the work and includes the affected community, which loses out on the indirect benefits of the work. The effective price of credits to buyers would then rise to cover the real costs of providing them to the entire community.
Fourth, it is important to recognize that ecosystem-based carbon credits that maximize additionality will not necessarily benefit the poorest community members or those who currently act in ways that preserve the ecosystem. To achieve additionality, payments must alter landowners’ behavior—that is, they must flow to those who were at risk of destroying the ecosystems they owned. Paying “responsible” landowners—those who have not and do not intend to degrade the ecosystem—does not change behavior and yield additionality. Those with the means to exploit and degrade the ecosystem are sometimes more affluent—and may have increased their relative affluence through these destructive activities—so targeting additionality may mean directing payments to wealthier landowners. A carbon credit–funded income stream that targets these most affluent and destructive community members, but which is unavailable to those who have thus far conserved forests, may appear unjust and become politically difficult to administer. These political barriers may especially arise if local governments, who are under democratic pressure to ensure fairness, are enabling the development of the conservation project.
In a cap-and-trade market, the regulator sets the cap, and the market then sets the price. The cheapest credits—representing the emissions that are least costly to remove—are bought first, and, as the emissions cap is lowered, the number of credits and, correspondingly, the supply of cheaper emission reduction opportunities are reduced, and the price goes up. Emitters can choose to sell credits at the price where it becomes financially more rewarding to reduce emissions and sell the credit than to continue emitting.
Because a cap-and-trade market ensures demand, creates scarcity, and assures quality, credits in well-regulated cap-and-trade markets command much higher prices than those in the existing unregulated voluntary market, and the prices for these credits increase over time. So, overall, there is more income available to communities and developers selling credits in these markets than to those selling in the unregulated market. In cases like those explored above, where there may be extra costs involved in producing credits that are considered fair and politically viable to implement—beyond those of compensating individuals for direct losses from ceasing ecosystem use—credit prices should include these costs.
The case the letter writers cite, where developers may choose to implement carbon-abatement schemes in ways that either bring more or less benefit to local communities, then becomes one example of a more generalized justice issue: how income from credits is split between developer and community, and how the community and developer decide on the final price that allows for conservation to happen and for credits to be sold. A commercially minded developer may want to share less of the credit-sale income and sell faster, for a lower price. And it is likely that a developer is both better informed and better funded than the community it is negotiating with, so it holds the upper hand.
This suggests, then, a final condition for constructing just international voluntary carbon markets. I have previously set out how cap-and-trade markets need to have mutually agreed-upon rules that ensure quality of credits in terms of guaranteed carbon reductions. The letter writers’ emphasis on the importance of paying attention to the social co-benefits of developing credits is justified; it should be possible to trade credits knowing that they were developed in a way that was ethical and economically just, and with a fair division of returns between community and developer. So voluntary carbon credit compliance markets should also have ethical rules and standards that developers are required to follow in order to participate in the market.