ADVERTISEMENT

Carbon Offsets Risk Libor Moment Without Tougher Rules

Manipulation Risk Identified in Europe’s Pollution Offset Market

The growing market for carbon offsets could be open to interest rate-style manipulation without greater transparency and standards, according to Bill Winters, Standard Chartered Plc’s chief executive officer.

The murkiness of the voluntary carbon market is harming confidence among potential investors seeking ways to tackle climate change, Winters said in an interview. He likened the current situation to the scandal over the London interbank offered rate financial benchmark that traders’ manipulated for their own profit.

Carbon Offsets Risk Libor Moment Without Tougher Rules

“We have examples where a voluntary or private market went wrong,” he said. “The most obvious one to me is Libor. The entire derivative industry for interest rates swaps was focused on a benchmark that turned out to be flawed.”

Companies including Goldman Sachs Group Inc. and Qantas Airways Ltd. buy carbon credits that promise to cut emissions elsewhere in order to meet their climate change targets. The market for these projects, which include protecting rainforests, switching to clean cooking stoves and installing wind turbines, covers 359 million tons of CO2 a year. That’s more than France’s annual emissions, according to Bloomberg NEF.

The carbon offset market is currently regulated by non-governmental organizations and carbon registries – some of which are taking steps to boost standards. But Winters said tougher rules are needed to make it easier for regulators to be consistent and transparent around pricing and trades in a similar way to how ratings agencies operate. Doing so could help to deliver a higher global carbon price.

Winters will chair a new industry taskforce looking to boost the market, with more than 40 members including, BP Plc, Royal Dutch Shell Plc and Unilever NV. The panel, which has its first meeting on Wednesday, estimates that the offset market will need to grow by between 15 and 160 times in order to meet the Paris Agreement that set a target of limiting global warming to 1.5 degrees Celsius.

Carbon Offsets Risk Libor Moment Without Tougher Rules

The taskforce is due to report its findings in January, and Winters said the aim would be to establish a framework that would allow for ongoing improvements and standardization. It was created by Mark Carney, former Bank of England Governor who is now advising the U.K. prime minister on climate finance ahead of the next round of global climate change talks that will be hosted in Glasgow next year.

Winters said there was a $40 trillion opportunity for markets to invest in sustainable projects globally. But many companies don’t have confidence that carbon credits they buy will maintain their value as offsets.

“That’s holding people back from making the kinds of investment that they would otherwise make. The objective is to increase confidence that the system is not rigged,” he said.

There are also doubts about the quality of many projects and whether they are genuinely delivering additional emissions cuts. Among the 300 million tons of offsets available, scientists think less than 10% are doing the job of storing carbon in a verifiable way.

Investors have ramped up pressure on companies in recent years to take concrete steps to cut carbon emissions. That’s increased demand for carbon credits, but also scrutiny. Companies and their shareholders want to make sure the credits they buy are actually delivering “additionality” – which means the projects wouldn’t have been implemented without offsets.

The voluntary carbon market is often like a less effective version of compliance carbon markets, such as the European Union Emissions Trading System, that are regulated by governments. But Winters said the voluntary market is needed in the absence of greater effort by national governments on implementing a global cap and trade system.

“Governments will not act fast enough and the evidence is in the past 20 years is they haven’t been fast enough,” he said.

Government-run markets that require certain industries to pay to pollute have a limited effect on the world’s emissions. There are 61 government carbon pricing systems globally that cover about 22% of the world’s emissions, according to the World Bank. And even under those regulated systems, the price of carbon may be too low to motivate polluters to change.

©2020 Bloomberg L.P.