Seeing a way to solve climate change turn into a money-making scheme is kind of ironic. It should be easy to understand carbon credits: businesses that pollute too much buy permits from businesses that don’t pollute enough. Green projects get money. The Earth benefits. It was a clear, market-sensible idea that would look great on a whiteboard. In real life, things have been messier.
Wall Street was the first to notice the hole. Carbon credits are bought by companies and then sent to projects that are supposed to absorb emissions. Along the way, more and more brokers, resellers, exchanges, and fund managers take a cut. Carbon Market Watch recently paid for a study that found that nine out of ten middle-men in the voluntary carbon market don’t say how much they make or what fees they charge. That’s not a small lack of transparency. That’s an industry that works mostly in the dark.
When the numbers come up, they are very interesting. It has been shown that credits are sold again for many times their original value, with the extra money going to brokers’ profits instead of the climate projects that were supposed to benefit. In most deals, it’s still not clear how much money ends up with local communities or project developers on the ground. It’s becoming clearer that a big chunk of it stays in the financial system for a long time before it ever gets to a forest or a solar array.
Just to be fair, intermediaries didn’t come up with this system out of pure spite. When voluntary carbon markets were first starting out, there wasn’t much demand and prices were low. This is when speculative traders really helped with liquidity. They bought credits that no one else was interested in and kept projects going. It’s important to remember that history.
But those forces have changed. The prices have gone up. Demand has gone up because companies want to keep their net-zero promises. Some of those same speculators are now sitting on large amounts of cheap credits that they bought years ago and are selling them to a much more willing market for a lot more money. The risk-taking that used to make the margins worth it is mostly gone now. The edges haven’t changed.
The quality problem that’s at the heart of all of this makes it extra difficult. This year, the Brookings Institution released an analysis that said carbon credits had major integrity problems. One study found that less than sixteen percent of the credits given to certain projects that were looked into actually led to real reductions in emissions. Credits that look the same on paper can lead to very different results in real life. One credit could be equal to real carbon removal. Another could be the result of bad accounting, a reforestation project that wasn’t closely watched, or a method that generous reviewers have since changed their minds about. At least some of the market doesn’t know the difference. They also can’t buy anything.
There’s a sense that this problem was almost built into the structure of the market. People who are smartest tend to win when there is information asymmetry, which means that sellers know a lot more about what a credit is worth than buyers do. Trading desks and investment firms have the teams and tools to check the quality of credit. Most corporate buyers don’t because they are under a lot of pressure to show their climate commitments every three months. As a result, the market values business sense more highly than concern for the environment.
All of this doesn’t mean that carbon markets can’t be saved. Abolition was not called for in the Brookings report. It asked for stricter rules on privacy, third-party verification systems, and better tools for buyers to check out what they’re buying. Technically, those are problems that can be solved. They’re tougher politically. The middle-men who stand to gain the most from disclosure rules are also the ones who stand to lose the most from them right now.
As I watch this, I can’t help but think about what the carbon market was really meant to do: not make money from trading, but send money to places where the climate needs it the most. That mission is still there. Under all the new things that have grown up around it, it’s just harder to find.
