How Can Carbon Credits
One of the keys to reducing greenhouse-gas emissions is finding ways for companies to offset their own direct and indirect emissions. One mechanism that has gained traction in recent years is the voluntary carbon market. This market allows carbon credits to be traded in exchange for money that helps fund climate-action projects. Those projects often come with co-benefits such as biodiversity protection, improved air quality, water security and new jobs.
But the market is struggling to address several key challenges. One problem is the fact that it’s not always possible to compare carbon-avoidance and sequestration projects apples to apples. That makes it difficult to know what the true impact of a particular project will be in the long term. Another issue is that current market structures do not ensure that credits are of high enough quality to meet a company’s carbon-reduction requirements. This can lead to the purchase of low-quality credits that could actually add carbon into the atmosphere rather than removing it.
These issues are likely to persist so long as there is no strong incentive to enforce rigorous standards across the carbon markets. Many of these problems will be addressed over time as the voluntary markets develop and reporting norms normalize. However, other issues may require market participants, standard-setting organizations, financial institutions, and market-infrastructure providers to collaborate on addressing.
How Can Carbon Credits Be Self Monitored?
In order to address these concerns, the industry needs a robust and transparent infrastructure for managing carbon-credit trading. This includes a core set of “core carbon principles” that provide clear, high-quality guidelines for carbon.credit; a “carbon attribute taxonomy” to help establish the quality thresholds that will differentiate credit qualities; and a scalable infrastructure for trade, post-trade, and verification. The infrastructure also needs to include liquid reference contracts to support price-risk management and supplier financing, as well as advanced data infrastructure that will increase data availability and enable better verification.
Finally, the market must develop an effective means of monitoring carbon-removal projects to ensure their integrity. This includes developing a system to evaluate and verify a carbon credit’s “durability,” which is the ability of the carbon to remain removed from the atmosphere over decades, in spite of changes in management practices or incentives, human interference or natural disasters. New technology that uses satellites or machine learning to monitor land can offer an important tool for this.
These steps would ensure that companies’ investments in carbon-removal projects are actually delivering on their promise of reducing emissions. They will also ensure that the carbon-removal industry has a strong, credible and transparent marketplace to attract investment in innovative technologies to reduce global greenhouse gases. In the end, this will contribute to the success of the Paris Agreement and other efforts to mitigate climate change. Christopher Blaufelder is a partner in McKinsey’s Zurich office; Cindy Levy is a senior partner in the London office; Peter Mannion is an associate partner in the Dublin office; Dickon Pinner is a partner in the San Francisco office; and Jop Weterings is a director of environmental sustainability, based in Amsterdam.
