THE PROBLEM of climate change cannot be solved without capitalism. Governments have tried for more than three decades with little to show for it. And while more of them are now engaging partners in the private sector, the world is still lagging in deploying the full power of the market. An announcement by the Biden administration this week can help to change that, by beginning a much-needed overhaul of the market for carbon credits.
Global investment in clean energy has accelerated but is far below what is required to restrain rising temperatures, and governments will not make up that difference on their own. Much of the capital will need to come from the private sector. And while businesses and investors are eager to provide it, in one crucial area — carbon credits — a market failure is keeping them on the sidelines.
Carbon credits, which are bought and sold in what’s called the voluntary carbon market, offer companies and investors many ways to reduce greenhouse-gas emissions. In addition to helping finance new clean-energy installations, these credits can drive capital toward projects with high upfront costs but high potential rewards, such as scaling up new technologies like green hydrogen. They can also play an important role in funding reforestation and ecological preservation, as well as financing the early retirement of coal plants.
There is enormous potential demand for carbon credits. Many business leaders recognize that the costs of inaction are enormous — and that tackling climate change is in their companies’ self-interest — and so they are setting ambitious decarbonization goals. That is not altruism. It’s capitalism.
Companies have far less control, however, of their so-called Scope 3 emissions, those generated by suppliers and customers. Allowing companies to purchase credits against these emissions — but only after they disclose and begin implementing robust plans aligned with the Paris Agreement — could dramatically increase the demand for them.
For the demand side of the market to function, however, the problems on the supply side must be fixed.
Right now, the market for credits is opaque and riddled with inefficiency. Buyers can’t be sure which credits are credible, projects often don’t deliver what they promise and sellers can’t be held accountable. This lack of transparency also opens the door for greenwashing, where companies claim to be making a much bigger difference than they are, which fuels public skepticism about the potential for private-sector leadership.
As a result, the market for carbon credits is much smaller — and far less productive — than it should be. Many of us have long been skeptical of it, and for good reason. As with any market, opacity breeds not only inefficacy but also corruption.
This is a market failure we can fix, and we should treat it like any other market failure. For instance: When banks collapsed and the stock market melted down in 2007, the world didn’t walk away from markets and banking. Governments worked to address some of the causes of the crisis, including requiring more transparency of opaque securities like credit default swaps and collateralized debt obligations.
A similar remedy is needed for carbon credits, because transparency does for markets what spinach does for Popeye. The story of Bloomberg is a testament to that.
When we created Bloomberg in 1981, there was virtually no way for firms (especially smaller ones) to negotiate bond prices with sellers, because sellers had all the information. As a result, prices were inflated, commissions were enormous, and the market was inefficient. By creating real-time bond pricing and making it available to buyers as well as sellers, we helped level the playing field and allowed more capital to flow to productive assets, benefiting investors — no matter how small their portfolios — and driving economic growth.
For markets to work well, they must be transparent, trusted, and standardized — three qualities that have largely eluded the market for carbon credits. But change is coming.
Today, the Biden administration released a policy statement and set of principles for building more transparent, responsible, and effective voluntary carbon markets. It’s an important step forward that builds on work led by the Integrity Council for the Voluntary Carbon Market and the Voluntary Carbon Markets Integrity Initiative.
Together these efforts have the potential to do for the carbon market what the Bloomberg Terminal helped do for the bond market in the 1980s. Through transparency and standardization, we can generate more trust that these investments are sound, turning a relatively small market into an enormous one, and a relatively inefficient one into a powerhouse. And in the process, we can unleash the market power that we desperately need on our side in this fight.
Tuesday’s announcement begins a new phase in this effort. Encouraging other nations to join it should be a priority for the Biden administration, including at November’s G20 summit in Rio de Janeiro.
Fixing the carbon-credit market won’t solve the climate crisis on its own, but it will go a long way toward enlisting the market in the fight.
BLOOMBERG OPINION
