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Lina Thomas is a fellow at Harvard University, where she teaches macroeconomics and American economic policy. Martin Søndergaard serves as a teacher and research fellow at the Mosavar-Rahman Center for Business and Management at Harvard University.
all To no one’s surprise, carbon offsets turned out to be one of the bigger casualties of the bubble hype that just happened. But will simply removing these markets help climate change?
Undoubtedly not. Carbon offsets may not be the ultimate solution to climate change, but they can still play a valuable role. Making them useful means focusing on the shortcomings of the mechanisms that control the inspection. Or in layman’s terms, carbon needs to be cleaned of crap.
You see, it turns out that trust in this market is just not nice. it is essential. A 90 percent drop in carbon prices and a 32 percent reduction in the supply of logging projects in two years are evidence of a crisis of confidence.
Building this trust requires a strong legal and regulatory infrastructure with a well-resourced regulatory body. This organization should have the authority and capacity to investigate and prosecute deceptive practices (yes, that would be very busy), thereby ensuring that carbon credit providers are held accountable. Such a frame will instill confidence in buyers and other market participants that you are not just buying air.
Companies are increasingly promoting their carbon neutrality. Apple announced this month that the new Apple Watch is its first carbon neutral product. But public skepticism remains high, and with good reason.
Past incidents, too long to mention here, have shown that companies often misrepresent their carbon offset efforts. A lack of trust and clarity devalues even well-intentioned initiatives. Like, what the hell is a carbon neutral watch?
This skepticism isn’t necessarily a knock against Apple, whose marketing rarely gets it wrong. It suggests that the current landscape does not have enough credible entities to approve loans. A recent Guardian investigation into the largest certifying organization of carbon credits found that more than 90 percent of rainforest carbon offsets are worthless.
And claims of sustainability can backfire. Delta Air Lines can be an example. it faces a class-action lawsuit in California for allegedly relying on questionable carbon offset programs to justify higher prices.
The challenge of justifying true carbon offsets can be broken down into two distinct questions. The first is the inherent complexity of accurately measuring true carbon offsets; a challenge for even the most diligent companies.
This focuses on three main factors. Additionality, ensuring that the project creates emission reductions that would not otherwise occur; Permanence, emission reductions that are sustainable. and leakage, avoiding new emissions elsewhere as a result of the project.
State oversight to validate claims and ensure impartiality will enable the market to develop and refine these methodologies. Without it, live the sorrow.
A second challenge stems from the potential bias of third-party verification organizations that have financial incentives to compromise their impartiality. Although these organizations often operate as non-profit organizations, their funding models (and need for revenue) inherently promote inspection projects that may not be worthy of inspection. Furthermore, industry competition is such that if a project is rejected, the owner may simply seek approval from a competing agency.
Government intervention is crucial to ensure impartial, reliable verification. No private entity can match the level of trust that a state-backed, well-funded oversight agency can command.
OK, so some governments are starting to crack down on greenwashing. But strangely, they treat it primarily as a marketing compliance issue, rather than acknowledging it as an emerging market that requires a level of regulation more in line with financial markets than advertising law.
Regulation must go much further. In the absence of strong and comprehensive measures, the consequences are inevitable.
First, carbon trading organizations that do reduce carbon emissions are at a disadvantage. They are being pushed out by organizations that make deceptive claims about their carbon offsets.
Second, the lack of strict controls fosters an environment of mistrust and skepticism among potential purchasers of carbon offsets. Unable to distinguish fact from fiction, buyers become hesitant to enter the market at all.
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Imagine a world where third-party organizations are solely responsible for auditing and verifying a company’s financial statements, with no formal oversight or legal consequences for foul play. Would you feel comfortable investing in such an environment? Probably not, because the risk of misinformation would be too great, undermining trust and seriously jeopardizing the efficient allocation of capital.
Similarly, without strong regulation, the market for carbon offsets is dangerously short of credible. Unless there is real government oversight, any commitment to combating climate change cannot be taken seriously.
Carbon offsets are still a good idea. But they should be regulated independently.
Implementation of such reforms is extremely important. It must be done quickly; the longer we delay, the harder it becomes to overturn entrenched skepticism and drive significant change in our global approach to climate action.
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