Why Carbon Credits Are Useful: Financing Environmental Transition

September 30, 2022



Carbon neutrality
Grégoire Guirauden

Grégoire Guirauden

Chief Operations Officer

Why Discrediting Carbon Credits Is a Serious Mistake in the Fight Against Climate Change

Disclaimer: I agree that the priority is the reduction of emissions by all economic actors. I am offering a perspective on the complementary utility of carbon credits in emission reduction and the fight against climate change.

Carbon Credits are a useful tool

While carbon credits are sometimes misused, they are not inherently a bad tool.

Criticism of carbon credits is widespread. The recent video by John Oliver has once again sparked debate about the usefulness or counterproductive nature of carbon credits. I believe we are making a mistake by attacking the mechanism itself rather than targeting its improper uses specifically.

Useful Carbon Credits

Carbon credits are primarily a tool for monetizing carbon between actors who emit it, like any economic activity, and those who reduce or capture greenhouse gas emissions. It is important to remember that carbon credits meet specific criteria to generate carbon sinks.

Reminder on the Characteristics of Voluntary Carbon Credits

Carbon credits were established to help countries engaged in the Kyoto Protocol meet their commitments.

  • It is a voluntary mechanism; companies that purchase carbon credits are not obliged to do so.
  • Projects that can benefit from the carbon credit system are subject to very strict selection criteria, ensuring the mechanism is as virtuous as possible.
  • The funds provided should finance solutions with a positive impact, needing these funds to deploy their projects and concretely fight for sustainable development.
  • Carbon credits are now used in addition to existing greenhouse gas emission reduction actions by companies and not as a replacement, under the risk of being severely and justly criticized, or even illegal in France from 2023.

Are Carbon Credits a Right to Pollute? An Indulgence?

Yes, carbon credits offset the inherent residual emissions of a company.

Indeed, carbon credits counterbalance the remaining greenhouse gas emissions of companies. However, whether companies buy carbon credits or not, they seemingly grant themselves the right to pollute when considering climate change figures. This is inherent in economic activity, as our entire system is based on energy consumption. I prefer a paid right to pollute that finances the transition and contributes to the common good over a de facto right to pollute that brings nothing. Regarding indulgences, once again, it is a matter of how this money is used and the volumes involved. If carbon credits are used to finance poorly verified, not very useful, and not very credible projects at negligible prices that do not encourage companies to reduce their footprint, it is clearly criticizable. If the projects are useful to the common good, duly verified, and they encourage reduction by setting an internal carbon price within the company, then we have a virtuous mechanism in every way.

carbon credits are useful

Carbon Credits: Implementing a Paid Right to Pollute, Rather Than a Free One!

To Summarise:

  • Yes, carbon credits can be seen as a right to pollute.
  • However, companies "pollute the environment" anyway because they operate.
  • It's better for companies to apply a price to their pollution rather than polluting for free.
  • The projects funded must be useful and relevant to the transition.
  • Communication should not be misleading, but there is no issue with a company honestly stating that it buys carbon credits in addition to its reduction actions.

Putting a Price on Carbon: The Most Effective Market Economy Mechanism

Carbon Credits: A Voluntary Carbon Price to Accelerate the Low-Carbon Transition

I deeply believe that the only way to accelerate the financing of the transition (and thus the transition itself) is to integrate environmental values into the economic system. If this world understands only money, let's give a monetary value to what is most precious to us. Without this valuation of environmental elements, positive impact solutions will never be able to develop fast enough compared to their carbon-intensive competitors.

This should start with carbon dioxide emissions, where measurement systems are relatively mature, and then extend to other elements degrading our ecosystems: water, waste, microplastics, fine particles, etc. Buying carbon credits for a company means literally taking money out of its ecosystem for a consumable value (the carbon credit will be tied to a carbon footprint) due to its lack of reduction in carbon footprint. With a reasonably high carbon credit price (as suggested by the French carbon neutrality law effective January 1, 2023), this is a strong incentive mechanism to reduce one's own footprint.

Carbon Credits vs. EU-ETS Carbon Quotas

Carbon credits are essentially a voluntary carbon tax, which has two advantages over the European carbon quota system (EU-ETS):

  • It can apply to any type of company.
  • The money funds useful projects for the transition instead of rewarding the best actors.

As for the argument that it would allow large companies to survive when they should disappear, I do not subscribe to it for three reasons:

  1. I don't think categorizing large companies as the absolute evil is the right way forward, especially when these structures have expertise, financial capabilities, and a huge potential impact.
  2. I believe large companies are filled with people just as well-intentioned as those in small ones because we will all be impacted, so I don't see why these structures would be populated with terrible climate skeptics.
  3. Even if my previous assertions were false, I don't think the carbon credits they would buy would be the determinant that allows them to survive or not.
carbon credits usefulness shown in a graph

Financing the Best Transition Projects with Carbon Credits

We Need to Multiply Investments in Low-Carbon Transition Solutions by Six, and carbon credits is one of the levers

The transition desperately needs funding. According to this BCG study, investments need to be increased sixfold, from €600 billion per year to €3.5 trillion to meet the Paris Agreement targets. In France, the National Low Carbon Strategy (SNBC) indicates that €20 to €40 billion per year is missing to meet the +2°C target.

Major Obstacles for Low-Carbon Solutions

  • Lack of competitiveness against carbon-intensive competitors due to the absence of a universal and sufficiently high carbon price
  • Limited access to investment funds due to the large investments needed for smaller returns compared to digital investments
  • Existing but challenging access to bank financing due to the lack of visibility on the valuation of carbon gains for these companies
  • Many solutions are still in early stages of maturity and have not reached a critical size to be competitive (refer to the third IPCC report on the evolution of renewable energy costs and their adoption due to massive investments in these sectors)
  • Low-carbon projects in Europe or developing countries need this money to scale rapidly

Low-carbon projects in Europe or developing countries need this money to scale rapidly, and carbon credits is one of the levers

One of the essential criteria for carbon credits is the additionality of projects. Carbon credits must finance projects that would not have come to fruition otherwise. These projects can be implemented in Europe or developing countries, though caution is necessary to avoid rebound effects when purchasing carbon credits for projects in developing countries. At Riverse, we favor investing in low-carbon projects related to the company's sector of activity.

Do We Really Have the Luxury to Ignore Abundant Available Financial Resources?

The Money Exists: Finance the Ecological Transition or Reward BlackRock?

The Money Exists: Record Profits for the CAC40 in 2020

Thirty-seven companies in the CAC 40 recorded a net positive result in 2020. Out of these €130 billion in profits (a record), 45% went to shareholders. I do not criticize this approach; our system rewards shareholders who invest in companies, and that is fine.

Considering the CAC40's scope 1, 2, and 3 carbon footprint, which amounts to 2,274 Mt CO2 (excluding scope 3 of the banking sector) - France's total is 430 Mt for comparison - only 12.5 million carbon credits were purchased, representing just 0.5% of the total (hardly a rush towards greenwashing).

10% of CAC40's Net Profit = €12 Billion for Transition per Year (vs. €6 Billion for France Relance)

If we take 10% of the net profit of profitable companies and invest it in carbon credits supporting the transition (biogas, biohydrogen, wood resources, recycling, reconditioning, energy efficiency), it would generate €17 billion in 2020, which is three times more than Macron's historic France Relance plan, amounting to €30 billion over five years, or €6 billion per year.

Let's remember that the combined revenue of the CAC40 is €1,200 billion, and the French GDP is approximately €2,000 billion per year. The potential funding sources are therefore immense.

I agree that this initial analysis is rough, and I invite you to contact me for more details. Nevertheless, in any scenario, colossal sums of money could be properly distributed with an effective carbon credit mechanism used by everyone.

I would be delighted to discuss this topic with you, as I am aware that my opinion may differ from others. However, rest assured that I share the same planet, the same convictions, and that I am equally in search of a solution to the enormous problem we face.

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