Voices: Three Keys To Unlock The True Potential Of Carbon Markets

The proliferation of low-carbon products — from batteries and biofuels to cement and steel — will be crucial to addressing climate change, but right now these products struggle to compete against their less expensive, standard counterparts. And with new leadership in Washington D.C., they now may not be able to count on the federal government to be an early customer and supporter.

That’s where carbon markets come in. These markets, where companies buy and sell environmental certificates to balance their emissions, could help clean technologies achieve scale and lower prices.

But first, the non-profit organizations that set industry standards for the use of these markets, the Greenhouse Gas Protocol (GHGP), the Science Based Targets Initiative (SBTi) and related carbon market registries like Gold Standard need to make some key changes:

• GHGP needs to expand how greenhouse gas emissions are measured;
• SBTi needs to provide flexibility for companies to meet their decarbonization targets;
• And carbon market registries need to adopt a new framework to effectively direct financing to clean technologies.

With key improvements, carbon markets globally could grow to $1 trillion a year by 2050, mobilizing vast capital resources that would lower the price of clean technologies and allow them to achieve the scale necessary to address climate change.

Current obstacles

Several concerns have been noted about the impact of carbon markets. Critics argue the GHGP and SBTi don’t fully incentivize companies to reduce emissions in emerging markets.

Critics also worry that without strong guardrails, companies could make misleading claims about their decarbonization efforts.

Recognizing these shortcomings, both standards are already undergoing revisions. Last week, SBTi published the much-anticipated draft of their revised Net Zero Standard for public consultation.

Furthermore, prices set by carbon markets do not reflect the real cost to deploy new clean technologies; in fact, they are often far lower.

Last year the size of the voluntary carbon market was estimated to be $2 billion; contrast that against the $5.6 billion raised by Blackstone for its energy transition fund.

An expanded approach

The first step to unlocking the true potential of carbon markets would be for GHGP to expand its market-based accounting approach to cover all sources of greenhouse gas emissions, not only emissions related to a company’s purchase of electricity.

Market-based accounting enables companies to purchase environmental certificates that can be used when measuring their annual emissions. These certificates are valuable because they recognize the environmental impact of a product, which gives credibility to a company’s claims that it meets voluntary or government standards for decarbonization.

Examples of environmental certificates include renewable energy credits that represent electricity generated from clean sources and carbon credits that represent emissions that have been avoided, reduced or removed.

SBTi’s draft revisions specify how companies can use environmental credits to show progress toward their decarbonization targets. For example, emissions from a company could be reduced using renewable energy credits, and residual emissions could be neutralized using carbon credits.

Adoption Readiness Levels

To improve market integrity for corporate buyers and direct finance toward clean technologies, a numeric rating called Adoption Readiness Level (ARL) could be used.

ARL is a concept derived from the Technology Readiness Level metric originally developed by NASA to evaluate whether a technology works in the lab, at scale or in real-world conditions. ARL goes further. Developed by the U.S. Energy Department, ARL represents the commercial maturity of a technology, on a scale of one to nine, by evaluating 17 indicators across four risk areas — value proposition, market acceptance, resource maturity and license to operate. Users of ARL include entrepreneurs, technical experts, project managers and investors.

Take sustainable aviation fuel (SAF), a key decarbonization opportunity for the aviation sector. The technology used to produce SAF from used cooking oil, the majority of SAF today, has a higher (better) ARL compared to technology that converts alcohol to SAF, which has yet to produce commercial quantities of fuel on a consistent basis. Both technologies have a lower ARL compared to refineries producing jet fuel, an approach that is fully commercialized.

If registries issued environmental certificates for clean technologies with moderate ARL, companies would be incentivized to invest in and deploy those technologies first. This could help steer resources and investment for a faster deployment of clean technologies.

By incorporating ARL, carbon markets could more effectively finance the large-scale deployment of clean technologies, enhancing the competitiveness of industries, economies and countries.

As government support for clean technologies wavers, it is imperative that GHGP and SBTI listen to companies requesting flexibility, whilst maintaining strong guardrails, to unleash the true potential of carbon markets.