Gautam Jain and Ned Shell on the Promise of Carbon Credit Markets

Ned Shell (0:04)

One of the missing pieces that I think countries are really stepping up on now is creating sovereign policies and regulations to guide and regulate the issuance and trading of carbon credits in their own markets. My expectation is a little bit more chaos for the next one or two years as everyone sort of figures out the right domestic regulatory regime that works for them.

Gautam Jain (0:27)

Without having proper infrastructure, essentially what that means is fully regulated exchanges or trading platforms. It'll be difficult for this market to scale up.

Bill Loveless (0:38)

Carbon credit markets have become one of the most hotly debated tools in the fight against climate change. Supporters call them essential to closing the gap between corporate climate pledges and what companies can actually achieve on their own. Critics call them a shell game that lets polluters buy their way out of real action. But the debate is about more than just whether carbon credits can work. It's about the integrity of the markets designed to trade them. The promise of these markets is fairly straightforward. The complexity comes in determining whether the credits actually deliver the climate benefits they're supposed to. New research from the Center on Global Energy Policy, supported by Bloomberg Philanthropies, examines the state of one type of carbon trading, project-based carbon credit markets. The study looks at how these markets are regulated and how they might be scaled.

This is Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I'm Bill Loveless.

Today on the show, Gautam Jain and Ned Shell. Gautam Jain is a senior research scholar here at the Center on Global Energy Policy. He focuses on the role of financial markets and carbon markets in the transition to net zero emissions, particularly in emerging countries. Gautam previously worked in the financial industry, where he covered emerging markets as a portfolio manager and strategist for asset management firms and investment banks, including the Rohatyn Group, Barclays Capital and Millennium Partners. Ned Shell is director of public policy and climate finance programs at Bloomberg. He is also a term member of the Council on Foreign Relations. Prior to Bloomberg, he served as consular to the undersecretary for domestic finance in the US. Department of Treasury, and held roles at Bain & Company and the World Bank.

We discussed what a carbon credit market actually is and how project-based carbon credit markets differ from voluntary and compliance markets. We got into the missed opportunity for US policy. The European Union's move to fold carbon removal credits into its emission trading system, and what high integrity really means when it comes to these credits. And we looked at where the market is headed, from Microsoft and Google's diverging approaches to carbon removal, to the road ahead for global rules under the Paris Agreement's Article 6 Here's our conversation.

Gautam Jain, Ned Shell, welcome to Columbia Energy Exchange.

Ned Shell (3:14)

Thanks, Bill.

Gautam Jain (3:14)

Thank you, Bill, for having us.

Bill Loveless (3:16)

You know, carbon credit markets are a complex topic, one that's confusing to many people. Gautam, can you explain in simple terms what carbon credit markets are and why they matter?

Gautam Jain (3:30)

Sure. Let me first start with what a carbon credit is. So a carbon credit represents one metric ton of carbon dioxide equivalent removed from the atmosphere or reduced or voided relative to a baseline. This enables assignment of a monetary value to a carbon term, which is basically the value of this carbon credit. When carbon credits are generated from discrete identifiable projects, they're called project-based carbon credit markets.

The research that we did was on project-based carbon credit markets. These markets cover the generation, trading, and settlement and retirement of these credits. In terms of why these markets are important, why do they matter?

Essentially, project-based carbon credit markets provide incentives to companies, especially those that have net zero targets to finance decarbonization activities outside the scope of their business. So as a result, there is a flow of capital to finance decarbonization activities that would not have otherwise attracted investment. Now, if you think in terms of what these projects are underlying these project-based carbon credits, they typically or many times are nature-based projects that are based in emerging economies typically. And when you think about who the buyers of these credits are, they're typically companies in the hard-to-bate sectors, hyperscalers and so on, that are looking to carbon credits to basically offset their residual emissions. And they're based in developed countries, so essentially it creates a flow of capital from developed to emerging economies.

Lastly, I'll just make one more point. Some of these projects also provide co-benefits. Co-benefits in terms of the preservation of land, forest, trees, water, and also biodiversity. And in the process, they support the local communities, economic development of these communities.