Our society is built on CO2 emissions. Almost everything we touch, from a light switch to the clothes we wear has been created by generating CO2. This cannot continue, but to stop and even reverse the trend of centuries, requires significant behavioural change and a lot of investment. The last 20 years have shown that good intentions are not enough and that other tools are needed.
The scale of the challenge is huge. Every year we emit 51 billion tonnes of CO2, but to limit global warming to 1.5 degrees by 2050, we need to achieve Net Zero, a formidable task. At Vitol we believe that this can only be achieved by leveraging the power of markets and private finance, and combining them with other legislative and regulatory initiatives. Carbon markets had a rocky start. The first EU Emissions Trading System collapsed in 2012 due to the oversupply of credits and a focus on other government priorities. However, renewed recognition of the need to address climate change has led to a resurgence of more robust government-backed emissions trading systems. To be successful, government-sponsored compliance markets have to interact effectively with the voluntary market.
Voluntary initiatives are beginning to evolve. As recognised by the Taskforce on Scaling Voluntary Carbon Markets, led by UN Special Envoy on Climate Action and Finance, Mark Carney and of which Vitol is a member, a successful market is a liquid market. Liquidity requires the creation of standardised contracts built on high quality specifications within a respected and robust governance framework. Some voluntary initiatives are based on projects of questionable quality, which risks undermining the asset class, but the right framework and controls with real integrity will attract market participants and promote investment in carbon abating projects. In the last few months, positive steps have been made in this direction with the launch of financial products based on UN standard offset criteria. Getting this right could result in a market worth an estimated USD 50 billion by 2030.
Some argue that carbon offsets detract from the more important issue of reducing emissions. Emissions reduction must be the goal, but meaningful reductions in emissions will require careful planning, reengineering and investment in all aspects of a developed economy. This will take time and, in the interim, investments in offsets can contribute to Net Zero. A second challenge is that many of these projects are in the developing world and that developed companies or economies are just trying to ‘buy’ green credentials. We believe that if an effective market drives investment into quality carbon abatement projects, it is a good thing. Furthermore, in many developing countries, it can generate local employment and enable the preservation of forests and the biodiversity they support, arguably benefiting local communities more.
In short, this is a huge opportunity to ensure that, in addition to traditional offsetting projects, this market spurs innovation and incentivises investments into CO2 abatement, reduction, avoidance and sequestration, all of which will be essential if we are to achieve Net Zero by 2050.
