by Lionesses of Africa Operations Department
Our title this week comes from the highly respected Trove Research that is now part of MSCI Carbon Markets. A long term study of the carbon credit usage based on a sample of 4,156 companies over 5 years within which they found that “‘Heavier’ users of credits are found, on average, to be decarbonizing more quickly than ‘lighter’ users of credits [and] [U]sers of higher integrity / higher priced credits are, on average, reducing their emissions more quickly than users of lower integrity / priced credits.” (here)
Before anyone worries that one huge company could skew the results for the rest, they state: “Companies whose emissions reduced by more than two standard deviations of the whole population median are excluded.”
So why does it work? And secondly if it works, why is the world seemingly caught like a Rabbit in the Headlamps of indecision over the Carbon Markets and especially the Voluntary Carbon Market (VCM)?
Let us take a step back and try to simplify what has become an overburdened industry of long words created to keep outsiders out.
Love them or hate them, bankers love playing with and designing solutions around stuff they can price and therefore trade, package and sell (for profit). Somehow the world needed to tap into this arena of fun-loving structurers and solutions filled brain cells to save the world by changing something very vague (CO2) into something that could be priced (a Carbon Credit) and then lob it into the Bankers’ sandpit for them to play and hopefully come up with profitable answers by pricing, reducing and removing, or put it another way, mitigate the risk whilst saving the world [yes, we have indeed just transformed pages of deep theoretical and academic papers into two ‘fun-filled’ sentences, our ever-forgiving Editor will be waiting for your letters as usual!].
The Kyoto Protocol of 1997 started the ball rolling, by laying out international CO2 emissions goals and started to build the regulations to back them.
With that, Governments gave allowances to industries which would allow them to emit up to a certain level, but for any excess they would either have to cut, or purchase excess emission’s ‘permission slips’ from other companies not using their full allotment, or who had cut down below their level and now had excess ‘permission slips’ to sell. Obviously if I was running a huge cement factory and happened to also be the brother of the country’s President then I would work very hard to increase as much as possible my allowances over the weekend family Barbecue as our kids played around us, but in essence this started the ball rolling as each ‘permission slip’ a.k.a ‘Carbon Credit’ equalled one ton of CO2 emissions (as per our dramatic title photo this week).
So a company buys a carbon credit (or carbon allowance), from the government and gains permission to generate one ton of CO2. Which is nice and easy, but paying a Government is one thing, moving that money into projects that could solve climate change and fighting the battle close up is another thing, and so we turn to Verified Carbon Credits (‘VCC’) and with it the Voluntary Carbon Market (VCM). *Just note that ‘VCC’ is ‘Verified’ not ‘Voluntary’ - one ‘voluntarily’ buys ‘Verified Carbon Credits’ on a ‘Voluntary Carbon Market’. Glad we sorted that out!
The US Treasury (here) then moves us on:
“In addition to [VCC’s] potential to drive decarbonization efforts, VCMs also have the potential to generate economic opportunity…through projects and programs in developing countries. VCMs can serve as an important source of revenue, enabling finance that advances decarbonization and provides critical economic support to many who need it.”
What this means is that now those polluters in the Global North (or anywhere - we are not choosy!) can purchase a VCC linked to a project in the Global South (again anywhere will do), for whom the project could not work if it were not for the extra injection of cash from the VCC (this is important and we shall come back to that one!). Sitting in your airline seat you will feel very smug that the £10 extra you paid ‘to cover your carbon Footprint’ is now going to some project holding back the flood waters in Mozambique or Lagos (ok, we’ll come back to that too!).
Vigilant readers will have noticed the one way street of cash mainly flowing from North to South, but even if one did not care too much about the fact that the North’s Industrial Revolutions started all of this, even today: “About 60% of GHG emissions come from just 10 countries, while the 100 least-emitting contributed less than 3%. Energy makes up nearly three-quarters of global emissions…” (here), with electricity being the largest.
Think Electricity is global, so we must stop picking on the Global North? 700 million people do not have access to electricity of which 600 million live in Africa [With all these stats, I’m beginning to realise why so few people invite you to dinner! - Ed].
So why does this work? Why is it that large companies actually reduce their emissions just because a price has been put on it, whilst so many continue to believe that Carbon Credits just give a permission to pollute. Trove Research found it was exactly because a price had been put upon it, that the accountants then got involved, and so it became something unable to brush under the carpet. It was suddenly a cost to be discussed at a high level…
So what’s the problem?
As U.S. Secretary of the Treasury Janet L. Yellen said (here): “[VCM] can help unlock the power of private markets to reduce emissions, but that can only happen if we address significant existing challenges…”
Significant challenges? Well we promised we would return to the Elephant in the room. It is true, it is so difficult to catch and measure a ton of CO2. This also has to be an additional ton of CO2 to what was there before the project started, or in the case of threats to huge forests, it really did need to be a serious threat, not just one imagined (as here). As the authors write: “We found that most projects have not significantly reduced deforestation. For projects that did, reductions were substantially lower than claimed.”
Or if one created cook stoves, one did have to actually measure how much biomass fuel was saved and actually check that these were being used(!), hence the recent cancellation by VERRA (see here).
But hold on - does that mean we just give up? Every year, an estimated 3.2 million people die prematurely from household air pollution caused by cooking in smoke filled rooms and most of those will be women and children and of course most of those will be in Africa with no access to electricity.
The US Treasury states that: “High-integrity VCMs can also deliver important co-benefits for communities, including supporting economic development, sustaining livelihoods of Indigenous Peoples and local communities, and conserving land and water resources and biodiversity.” And there’s the important part - ‘High Integrity’.
VCCs work, they really do work to bring much needed cash to those in the forefront of the battle against Climate Change. Whilst we recognise many, many Lionesses read these articles, some of whom are looking at the VCM and wondering how they can afford the expensive consultants to use this to significantly subsidise the work they are doing to allow them to spread into huge underserved populations (underserved because they simply do not have the money, yet each day for example cook in a smoke filled hut or room), please contact Melanie to see if we can use the power of the community to assist you on your journey (we have many who have walked the VCM road already and will send the ladder back down).
But we also have many readers in serious positions of power, who with their voices and decisions can bring the conversation away from ‘it’s all hot air’, to what can this deliver if we and our companies and organisations (over which we have power and influence) work with those with high integrity?
But how do we know those with high integrity? As all bankers will know, the market never lies. In the secondary market there are some VCCs trading at mere pennies (and we agree, should be lower still) but others such as Wonderbag owned by the inspirational Lioness Sarah Collins are trading at a huge premium because she is not only verified, she has issued recently (one of the very few) and has delivered millions of her bags across Africa as well as into war zones, changing and saving lives. That is High Integrity.
As Trove Research state: “The opportunity to reduce costs then helps to strengthen internal business case(s) to reduce emissions in that firm’s investment / budget approval processes…Firms engaging with credits are also likely to take their climate impact seriously and have well developed mitigation and carbon-credit strategies.”
QED. Cutting costs then becomes a clear business case for a drastic reduction in emissions.
…We should have been a banker!
Stay Safe.