Are Carbon Credits a Financial Scam?

When money is the way to avoid an announced disaster.

Where do they come from?

"Energy is indeed the major contributor to climate change and to local air pollution", Global Energy Fundamentals by Simone Tagliapietra (2019).

Many hydrocarbons are required to keep our modern way of life uninterrupted.

A fancy trip from the US to Thailand accounts for many Co2 Kg per person. Getting clothes and electronics delivered from factories in Asia to your doorstep in Europe requires burning fuel. Hosting work files and selfies in the cloud requires electricity.

Every day the world consumes gigantic amounts of energy; roughly 84% of it comes from fossil fuels, oil, natural gas, and coal. This percentage remains almost uniform, independent of the group of countries considered (OECD 80%, Non-OECD 87%).

Even after the effect Al Gore’s movie ‘An Inconvenient Truth’ caused, fossil fuel consumption grew by 20%, from 113,613 to 136,762 TWh (Data from Ourworldindata.com). Emissions soared 17.5% in the same period (BP 2019 Statistical Review).

Temperatures are rising. Mainstream scientists agree on the origin of that phenomenon. Carbon dioxide is to blame, even though the primary greenhouse gas is water vapor, the well-known H2O.

Ideally, cleaner options should replace fossil fuels, but that is impossible to this day. It might even be possible that replacing one with another on a 1:1 basis could be achievable, not because the sun, sea, or wind are not abundant enough, but because the potential energy contained in fossil-originated liquids is greater than the one obtained from renewable sources.

But that’s physics. Finance has a different interpretation.

As Maslow said:

“I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.”, if emissions are the consequence of keeping economies growing, it could be applied the other way around, by creating financial incentives that help of fighting global warming.

After all, morale alone could not stop them (and us).

---

Carbon Credits 101

Let’s start with the official definition:

A carbon credit is a tradable permit or certificate that provides the holder of the credit the right to emit one ton of carbon dioxide or an equivalent of another greenhouse gas. The main goal for the creation of carbon credits is the reduction of emissions of carbon dioxide and other greenhouse gases from industrial activities to reduce the effects of global warming.

Based on the text, a Carbon Credit is a tradeable instrument that gives the buyer the right to pollute.

It is like admitting you cannot change yourself and procure it from others. A man can't stop drinking; therefore, he buys some soberness from one of his acquaintances.

These Carbon Credits are presented as projects; companies can put their money into diverse initiatives, mostly in developing countries, allowing the local population to improve their quality of life.

Many have had remarkable results, such as the one that provided stoves, preventing poor communities from inhaling toxic fumes when cooking.

Other examples, like reverting desertification or investing in young female education in Asia and Africa, have also been successful.

Sadly, that's the upside. Carbon Credits also opened the door for polluters to clean their image; instead of changing their practices, they can concur with a market that assigns value to a certain volume of gas that threatens us in the long run.

The most pervasive effect of it is the network of commission-getters. Lobbyists, financial institutes, and high-standard-of-living NGO executives make their living out of credit exchange and project management.

Under a non-exhaustive assessment of greenhouse emissions' effects, externalities such as respiratory problems would be considered. The model has been designed as a mild solution for a major crisis.

---

How a single Carbon Credit is calculated

There is no convention on measuring the cost of a carbon dioxide tonne, and it doesn't surprise me, to be honest.

It depends on the program the buyer engages in. It works more like a menu on which you fish for prices depending on your budget and how cool is the project you want to 'support.'

You love nature, so let's plant some trees in Patagonia. Are you a social rights activist? Let's support knitting schools for girls in Sri Lanka. If your dog is your best friend and considers all living nature part of your family, you must stick to Kenia's great cats' program.

Let's take the Air Travel Industry as a reference. When buying a ticket, soon-to-be passengers can pay for the CO2 their trip will generate.   Options vary from S$3 up to S$25 (US$2.20 to US$18.41)

Don't get me wrong; any program meant to benefit nature, equality, and improve life quality is welcomed. What causes a massive dissonance is that countries' economic activity and companies are the roots of some of those problems.

A vicious cycle that encompasses advertising products and services people don't need, overspending using easy-to-access credits, and permanent changes in trends and values.

When approaching this model, a question arises: Who calculates the total amount of emissions a country or company generates?

I've been part of a team whose responsibility was to determine the volume of the emissions from the company I used to work for. My task was to give a consultant all the data for them to come up with an estimation.

To this day, I believe the environmental consultant assigned to our project trusted in what she was doing; she put a lot of effort into having an overall image of how offices, workers commuting, electricity, air conditioning, logistics activities, and purchased from China generated in terms of emissions.

The results could have been more specific. Based on the information available, I understood that it is almost impossible to have an accurate idea in terms of carbon footprint. Internal procedures are not designed for it; even on those that have been updated, it is common o find flagrant emissions miscalculations.

---

Follow the money

"I would say, 'Follow the money, Earl, because that's where it's going to be.' Unfortunately, we did not get it following the money because the records were either nonexistent or were destroyed."(All the President's Men, by William Goldman 1976).

Our ever-growing economy works under the promise of more significant returns in the future, doing whatever is necessary today to achieve so.

Jørgen Randers, author of The Limits of Growth (1972), words:

"It is cost-effective to postpone global climate action. It is profitable to let the world go to hell. I believe that the tyranny of the short term will prevail over the decades to come. As a result, a number of long-term problems will not be solved, even if they could have been, and even as they cause gradually increasing difficulties for all voters"

Here comes the profitability-sustainability paradox. Everyone agrees something has to be done, introduce a carbon price, on fuels, on polluting activities in general, but when election times come, no one votes for those alternatives.

Societies and businesses will put short-term goals before a blurry defined future.

If a political option wins the election and issues new rules capping pollution quotas, it is enough for businesses to relocate to other territories with lax regulation. Money flows not only through financial institutions but between countries.

In the majority of cases, under the current Carbon Credit system, as stated before, money flows from highly industrialized to developing countries. And on its way, generating fees for those managing and allocating the funds.

---

The Controversy

I side with those who think it's better to do something than nothing. If you believe weather conditions are changing, you also understand that the consequences are terrible. Storms, droughts, wildfires, and extreme temperatures are most likely to occur in their extreme forms due to a hotter planet.

Nevertheless, the tools we have developed until today have serious flaws, and we must talk about them.

Has the Carbon Credits model impacted the amount of CO2 emitted somehow?

The answer is: No.

You don't have to be an expert or a researcher to discover that emissions have soared in recent years; just Google it.

Instead of focusing on the difference between the proper price of the carbon emissions effect and the one assigned by the market, we should concentrate on the message it sends. By creating a market-like instrument, we are replacing the co-responsibility we all share rather than adapting the current financial-productive system based on growth and resource depletion into a common good one.

How we relate to the planet highly depends on our upbringing. I was born in 1977 and come from an oil-rich country with customs copied from the US. Sustainability, environmental concerns, and clean energies were subjects I remember hearing about when growing up.

Current policies and agreements are made by a generation older than me (and I’m 45). These people are trying to make a real effort to clear the path for a better world, but this work is far from good. Younger minds need to jump into the discussion.

According to a report from 2016, up to 85% of offsets have a "low likelihood" of creating real impacts. Although hundreds of public affairs specialists showcase numbers that support the system's effectiveness, carbon credits are like coins with two sides.

Weak tools lead to mediocre results. The clock is ticking, and we need to address the emissions issue. Ambivalent solutions and perspectives are human approaches. In the meantime, the planet is still ruled by the laws of nature.