Anatomy of a carbon credits scandal
If the government offered to let you magically double your money from an investment that would “have a positive impact”, would take them up on it? I would. If you were the government and this promise cost you nothing, would you make it? I’d probably do that too.
Shell and the Alberta government certainly thought this was a reasonable proposition. In their case though, the investment was to reduce carbon emissions, and the government let Shell, an oil company, sell twice as many of them as they actually cut. This is problematic.
Alberta presumably let Shell do this as an added incentive to lower emissions. Cutting emissions usually costs money, and selling carbon credits is a way for investors to justify this expense if there is otherwise no financial or legal incentive to do so. But to sell a credit requires a buyer.
Sometimes governments will mandate that a firm buys carbon credits to offset their emissions, if they cannot reduce them in their own operations to meet a specified emissions target. This happens already in European and British power markets. Some firms, out of the goodness of their corporate hearts, volunteer to buy carbon credits to offset their own carbon emissions. Often the price they pay is cheaper than reducing their own emissions, otherwise they’d presumably do that instead.
On its surface, this seems like a good trade. If another firm can reduce carbon emissions more cheaply than you can, it seems better to pay them for this service and keep on emitting yourself. The problem is, if that carbon credit does not actually represent real emissions being reduced, you as the purchaser have wasted your money, at least as far as the climate is concerned.
Who is really to blame for this?
It’s tempting to shout down the big bad oil company, as the FT did this week with the headline, “Shell sold millions of phantom credits”. As I was reading, I thought perhaps the companies who bought these carbon credits were also culpable. After all, they must have known they were double counted, and thus probably cheaper than other credits they could have bought.
But I think the fault is squarely with the Alberta government, and private actors were merely playing their best hands. I believe it is the government’s role to set the rules for businesses to follow, like correcting for externalities that are not priced into conventional measures of profit (e.g. environmental damage) or ensuring the market functions fairly without abusing power. Alberta’s aims were noble, but it seems they were trying to reduce environmental damage in a way that reduces pressure on their budget from direct subsidy payments. Someone else is implicitly footing the bill.
At best, inflating the number of carbon credits that a company is allowed to sell sows confusion and doubt in the carbon credit market, making companies and people less likely to buy into its benefits. At worst, this credit manipulation allows companies to get away with not reducing their emissions at all. We can’t afford for either to happen if we genuinely care about reducing carbon emissions, least of all at the hands of our own governments.