The White House is fueling the carbon offset market without fixing it

There are two key theses driving the administration’s embrace of carbon markets. One is that carbon trading, which amounted to $1.9 billion globally last year, can and should be a key channel through which to move money from the pockets of big companies into climate-impacted communities in poorer countries. The US is far behind most of its peers in its contributions to global climate finance, and facilitating a bigger carbon market is an alternative measure for the administration to tout in advance of the finance-focused COP29 summit this fall. The other thesis is that voluntary carbon markets can be a kind of warm-up act for an eventual transition to economy-wide mandatory carbon pricing, the long-held and elusive dream of climate economists.

The voluntary carbon market — which includes companies and nonprofits that develop carbon projects, mostly in developing countries; the traders and other intermediaries that sell these credits to airlines, oil companies, and other buyers; and the buyers themselves — has spent the last few years under increasing pressure to prove its legitimacy. Numerous studies and investigations have found that carbon projects frequently over-estimate their benefit, either by supporting clean energy projects that would have been built anyway, for example, or for protecting forests that were never at risk, and can lead to land grabs and other abuses of the hosting community. Industry-supported groups like the VCMI have been racing to develop rules to both avoid a strict government crackdown, and to ensure they do not completely lose public credibility, which would also turn away buyers. 2023 was a slow year in the market, Kenber warned, because of companies’ fears of being tarnished as greenwashers.

In practice, guidelines from the White House or groups like VCMI won’t drive bad credits out of existence. Instead, it is more likely that the market will fragment, as it has already started to do, with higher-quality credits commanding higher prices that image-conscious companies will be willing to pay. Any new projects developers might propose will have to meet a higher bar, in terms of demonstrating a genuinely additional, long-lasting carbon impact, or fewer brokers will bother to list them. To that extent, a bigger, better voluntary carbon market can function like a de facto national carbon tax even when policymakers remain unwilling to put a proper one in place.

Still, it’s likely that in the absence of binding regulations, more carbon market scandals will be forthcoming sooner or later — especially if the effect of the White House announcement is to reinvigorate companies’ interest in buying.

At the same time, the Biden administration is nudging the carbon market in the direction of higher quality by using its direct purchasing power to support a range of nascent carbon removal startups. Also announced on Tuesday were 24 awardees of $50,000 each, covering most of the carbon removal technologies in existence, including big carbon-sucking fans, burying organic waste underground, and enhanced rock weathering. Later this year, a smaller group of 10 companies will be selected to sell the government up to $30 million in carbon removal credits, which are the most beneficial for the climate but also the most expensive on the market, often worth hundreds of dollars per ton. Here the government is following the steps of Microsoft and other tech companies that have recently been pooling their resources to become the first generation of carbon removal customers.

“Ultimately a government buying signal is stronger than what the private sector can do,” said Giana Amador, executive director of the Carbon Removal Alliance, a trade group. “The tons [the Department of Energy] selects to purchase will be extremely impactful and really drive the next phase of the carbon removal field.”

While getting a set of high-level principles from the White House is welcome, it doesn’t do much to alleviate the concerns many companies have about being accused of greenwashing, said Levi McAllister, an attorney who leads the energy commodity trading practice at law firm Morgan Lewis. Exposure to greenwashing litigation does ultimately boil down to the details of specific projects, he said, so companies will likely remain wary of buying into the carbon market until there’s more evidence that offset brokers are actually adhering to these principles.

Meanwhile, the idea that carbon credits are a silver bullet for global climate finance remains unproven. The market’s $1.9 billion valuation in 2023 is a drop in the bucket compared to the roughly $1.3 trillion in total climate finance that changed hands last year. The market is expected to grow over time, possibly to above $1 trillion by 2050. But much of that money will wind up with traders in the global north who collect fees and sell credits at large markups. Right now, there’s no system for tracing the flow of capital through the market, said Gilles Dufrasne, policy officer at the nonprofit Carbon Market Watch, and “there is no point in scaling this market if we don’t know where the money is going.”