Greenwashing will mean the ‘death’ of carbon markets

Greenwashing will be the “death” of the voluntary carbon market if market participants cannot develop common and rigorous standards and taxonomies for carbon offsets, Citi’s Belinda Ellington warned.

Speaking during an ISDA panel last week, the head of Citi’s London legal team said building a reliable accreditation system for offsets will be a vital step to preserve and bolster the role of the carbon market.

“If you go talk to most people and say ‘What do you think about offsetting?’ The majority of them will say ‘it’s a scam’,” said Ellington.

“We got to get rid of that attitude to offsets and the only way to do that is for people to really be able to believe it’s genuine.

“The governance has to come around the accreditation of the process of creating that offset.”

The carbon emissions offset market has been around for many years, but financial industry participants have only recently started at the task of building a more creditable and comprehensive market. The Taskforce on Scaling Voluntary Carbon Markets (TSVCM), for example, is a private-sector-led approach to developing a common global standard for carbon offsets.

Claire Coustar, global head of ESG, fixed income and currencies at Deutsche Bank, added that adopting a streamlined global  approach will be equally critical.

“Unless you address it through a global solution, which is effectively what you get with the voluntary carbon markets, you’re going to end up with patches of solutions. Some of which may not actually achieve what ultimately we need to achieve globally.”

Former Bank of England’s governor Mark Carney said last week the offsets market is currently small, valued at around $1bn a year, but has the potential to expand into $100bn to 150bn market if backed by credible initiatives – calling on the sector to steer away from using offsets as “indulgences.”

The main argument in favour of the voluntary carbon market is that it will play an essential role in helping companies that have made net-zero commitments reach them through a combination of abetment and offsets.

However, criticism against the logic of carbon offsetting has also increased, as recent science-based reports on worsening global climate conditions have prompted dire warnings against any solution that doesn’t directly cut off emissions and favours economic transition away from fossil fuels.

A report released last week by the US Financial Stability Oversight Council now identifies climate change as an “emerging and increasing threat” to financial stability, which means the debate around the credibility of the carbon offset mechanism will come under increased scrutiny.

As part of the 1997 Kyoto agreements, some jurisdictions have set up a ‘compliance market’ where certain industries and energy-intensive activities are mandated to offset greenhouse gases emissions. Though the compliance market is currently magnitudes larger than the voluntary market, Ellington said this market is not meant accommodate everyone.

“There is a limited number of offsets within the compliance market,” she noted. “If you allow people to buy into that, then you don’t have enough for the essential emissions (e.g. power).”

It’d be “essential” to have “an extra resource of offsets for people to use,” Ellington argued.

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