The voluntary trade in ‘CO2-credits’ is not a good idea in its current form. This is stated by the Netherlands Authority for the Financial Markets (AFM) on Tuesday in a special report accompanying its annual report.
The idea behind the voluntary trade in CO2credits is that companies can offset their own carbon dioxide emissions. With the credits they buy, CO2financed reduction projects.
In the Netherlands, Rabobank has been active as an intermediary in this market since 2021, with Microsoft as an important customer of its ‘carbon bank’. With its income, the cooperative bank finances the sustainability of hundreds of African farmers. The financial regulator sees major objections to this voluntary trade in CO2rights – without mentioning Rabobank by name, by the way.
Read also: Every bank must become a ‘carbon bank’ – and Rabo wants to be the first
A major concern of the AFM is that carbon banking may be at the expense of efforts by companies to radically reduce their emissions, as agreed in the Paris Agreement. Compensation instruments should only be available for emissions that are really very difficult to reduce to zero, the regulator believes.
“There is a risk that companies will use all CO2emissions for which reduction yourself is more expensive than buying voluntary carbon credits, as ‘difficult to reduce’”, writes the AFM. “As a result, the focus shifts from reducing our own emissions to buying credits and there is a risk that scarce compensation capacity that we will still need in the future will be wasted in advance.” According to the AFM, this undermines the goals of ‘Paris’ and undermines the credibility of sustainable claims of companies participating in carbon banking.
Control is missing
The AFM is further concerned that, unlike with regulated CO2rights such as the European emissions trading system, there is no control over the quality of the voluntary carbon credits. For example, there is no monitoring system for the projects financed with the credits. The question arises whether these projects would not have got off the ground without the credits, just like the CO2reduction – and then for free.
Moreover, there is no maximum number of carbon credits and there is no standard agreement with which a credit must comply. This makes it difficult to set a fair price and, according to the AFM, project developers, brokers, traders and end users have incentives “to spend as many credits as possible, instead of striving for good quality”.
Quality issues
According to the regulator, the trade in carbon credits can have benefits for nature and the environment, but it is important to see this separately from all efforts to reduce emissions to zero (just zero), as agreed in the Paris Agreement. “Current quality issues make voluntary credits unsuitable for use in the accounting thinking underlying ‘net zero’, in which own emissions and purchased credits can be offset against each other.” Due to the certainty of the emissions of companies against the uncertain value of carbon credits, according to the authority, they cannot be equated with each other.
The AFM says it is making efforts to improve the quality of carbon credits and the integrity of international trade in them. “Nevertheless, it seems difficult to address all the concerns that play a role in this market within the framework of ‘voluntariness'”, according to the AFM. Given the need to reduce CO emissions2 to reduce as quickly as possible, she argues that ambiguity should be avoided about whether companies are doing the right thing or not. This is best done within the framework of a mandatory market with clear legal principles, according to the AFM.