Carbon finance is a widely used method of climate action promoted by states. However, it’s an area where much needs to change to be effective.
Global warming has become a much more painful problem than we might have expected. Extreme weather events related to climate change have resulted in a total loss of about $65 million
in the first half of 2022. Perhaps the second half of the year will provide even scarier numbers. Europe was hit by drought and extreme heat this summer. The worst of these heatwaves have resulted in several fires, and the death toll from weather-related disasters is only increasing.
At the country and large corporate level, ignoring the issue is no longer an option. Today, the desire to reduce the impact of global warming is changing the principle of competition in the European market. Not only is a product’s price important. So is its carbon footprint.
When the Kyoto Protocol
was replaced by the Paris Agreement
in 2015, most European countries had already introduced special levies to incentivize carbon emissions reductions. Every company in Europe has a goal to avoid CO2 emissions through measures such as using energy-efficient lighting and air conditioning in offices, prioritizing telecommunication over business travel, supporting climate projects, and monetarily offsetting emissions when they're unavoidable. The need to compensate companies with money for the environmental impact they cause is now the norm.
This is called carbon finance: companies financially value their carbon emissions and sponsor projects to remove greenhouse gasses from the atmosphere at the same rate.
Offset programs are already ubiquitous and have become common among consumers. They can be seen when shopping at marketplaces or booking tickets. However, they can make little difference at the volumes that carbon finance currently operates.
Carbon offsets do support conservation, stop deforestation, and help meet emissions reduction goals. Still, carbon finance is not sufficiently transparent and publicly available to make much of a dent in climate change.
Recent studies suggest that offset projects are not achieving their claimed effectiveness. For example, California's forest offset program was found
to overestimate its emissions reductions by more than 80%
. A 2019 study found
that most forest conservation projects don’t provide their stated and intended environmental benefits.
As a result, carbon emissions are not offset and climate change is not stopped. And these climate changes – manifested in hurricanes, wildfires, and other disasters – continue to affect the continued efficiency of projects.
While large projects face setbacks, it’s difficult for smaller environmental projects and companies to participate in carbon finance because of the high threshold for entry. As a result, huge amounts of carbon footprint absorption are not being accounted for, and the projects aren’t being properly funded.
It’s also likely that climate action will need to go far beyond the existing framework. A 2017 study shows
that carbon payments cannot solve all deforestation problems and are only useful in some areas.
Conservation programs need to be more diverse, accessible to smaller actors, and transparent. Carbon credit pricing also needs to be clearer so projects and companies can plan their finances.
It pays to be transparent, because being opaque now poses an additional high-cost risk. The economy is on the verge of a major transformation, and companies should seriously consider new goals and tools to minimize risks and financial losses.
Carbon finance needs to become more flexible and dynamic to do its job. This requires tracking, information security, and exchange technologies that can be easily integrated into the existing market to make it more flexible and efficient. Blockchain, AI, the Internet of Things, and other technologies must adapt carbon finance to make it work. Its technological underpinnings can help small projects make money and large projects track the dynamics of carbon uptake in real time. Better planning and transparent pricing will make carbon finance a sustainable backbone of the carbon-free economy.