A market for carbon credits

Global offset market has potential but also perils

It is good news that there is finally interest in policy circles in India in finding solutions to the problem of building a proper carbon credit trading system that can be accessed by India’s farmers. This newspaper has reported that the Indian Agricultural Research Institute is tying up with a private sector company to develop a carbon credit marketplace targeted at farmers. The theory behind such a marketplace is simple. Farmers gain tradeable carbon credits by demonstrating that they are taking action to sequester, or possibly reduce, their carbon footprint. These actions could range — again, theoretically — from planting trees to avoiding ploughing to using specific climate-sensitive agriculture techniques including organic farming. Each action would correspond to a certain amount of carbon either sequestered, meaning removed from the atmosphere, or abated, meaning not emitted when it otherwise would have been. These credits, traded on the marketplace, would then be purchased by carbon-intensive companies in sectors such as fertilisers or cement that seek to reduce their overall carbon footprint. As a positive byproduct, some form of carbon price might develop in the marketplace and that could be used as a policy input.

It is to be hoped that such an effort will succeed, but the hurdles to be surmounted are considerable. Other countries have better-developed carbon credit markets, which their farmers have struggled to access. In one recent auction, Microsoft hoped to buy millions of carbon credits but ended up buying only 200,000 from American farmers because of problems of verification and monitoring. Thus, the outstanding design problem in the market is precisely this: The creation of credible monitoring that carbon is being abated or sequestered. If abated, then for each action a counterfactual has to be constructed as to how much carbon would otherwise have been emitted, which is difficult. For sequestration, then it has to be confirmed that the carbon stays sequestered — for example, that the land is never again ploughed, and thus carbon is not released into the atmosphere. Even such a relatively simple action as tree planting ran into monitoring problems in the past. In one famous example from two decades ago, the British band Coldplay sought to offset its carbon footprint by planting 10,000 mango trees in South India. But it turned out that, shortly thereafter, almost half the trees had died due to an inhospitable environment, poor cultivation techniques, and a lack of irrigation or fertiliser. The incentives for farmers are thus complex and will need to be worked out if this market is to function.

Yet there is potential too. International voluntary carbon credit trading would allow for Indian farmers to soak up potential revenue from companies elsewhere in the world that are struggling to offset their activities. The former Bank of England governor, Mark Carney, heads a task force for scaling up voluntary carbon markets. The task force has sought to make such cross-border trading easier. Currently the size of the global voluntary market is only $1 billion. The COP26 climate conference last year came up with mechanisms to balance these credits against Paris Agreement decarbonisation targets. But activists at COP26 last year objected to these efforts as “greenwashing” industrial emissions. It is up to policymakers and private sector ingenuity, alongside support from regulators, to prove these concerns are unfounded.