Do We Want Regulation, or Not?

The newsletter for professionals cautiously approaching the discussion about climate, but pretty sure they should.

Issue Number : 17

Part I: A Short Comparison of the Carrot and the Stick

Do we want standards to follow or not? That is the question - at least for carbon markets.

We all know that carbon markets have gained significant attention as a potential tool for various applications, including providing a means for companies to buy emission offsets. It is currently a very complex and fairly unregulated environment with a host of players that change all the time. It’s interesting, confusing, and perhaps even annoying to try and keep track of what is going on if you are in the ag and energy space and either want to consider selling into a carbon program or are trying to understand the myriad of definitions. 

But, if I hear one more social media sound bite about how ‘carbon markets are the wild west’...  

Anyway, it’s tempting to desire regulatory constructs to provide some clarity. But, could hoping carbon markets become more regulated become a case of being careful about what you wish for? Are there advantages? What are the disadvantages? Since I wasn’t really sure where I landed on the debate, In this month’s series, I’ll explore it with you.  

What we know: a carbon market offers a mechanism for trading carbon credits. Credits purchased provide economic incentives for organizations to claim an offset for their greenhouse gas emissions. Certainly, minimal regulation allows market forces to dictate the direction, but what are the compelling reasons to consider regulating carbon markets? This week, let’s look at a handful of advantages: 

Ensuring Environmental Integrity:

Probably the most obvious potential reason for more oversight in the arena is to ensure environmental integrity. Without proper oversight, there is a risk that carbon offset projects may not deliver the promised emissions reductions. Regulators can establish rigorous standards for project eligibility, verification, and monitoring, ensuring that only high-quality carbon credits are traded. This enhances transparency and trust in the carbon market.  

Avoiding Greenwashing:

It seems just about every major company is getting accused of greenwashing right now. 

(Greenwashing: when an organization falsely claims to be more environmentally responsible than they actually are.)

Certainly, it is going on and yet it would be pretty easy to inadvertently greenwash when much of the carbon market has no standard, accepted practices or standard verification tools. Regulation can help prevent that with clear and enforceable rules. It might help hold companies accountable for their emissions reductions claims and discourage fraudulent activities that undermine the credibility of carbon markets. 

Balancing Economic and Environmental Goals:

Carbon markets operate at the intersection of environmental and economic interests, so the case could be made that a balance between incentivizing emissions reductions and avoiding undue financial burden on businesses is/could be the gold standard. If not done too rigorously, that is… walking a thin line here.

Predictability and Market Confidence:

Well-designed regulations provide market participants with predictability, reducing uncertainty and increasing investor confidence. This one may be what everyone desires most of all-the idea of simply knowing what to expect. Now, that could be inviting in ‘the devil you know’, but I am getting ahead of myself. We’ll cover some disadvantages next time!