Kerry’s Climate Credit Plan Risks Payouts for Carbon-Cutting Mirage

(Bloomberg) -- US climate envoy John Kerry arrived at the United Nations climate summit in Egypt with a new plan to expand the sale of carbon credits in order to boost renewable projects in developing countries. But people briefed on the Kerry proposal warned in interviews that it mirrors a failed offset system created decades ago, and his framework has already been panned for allowing money to flow to green projects that would have happened anyway.

That means the funding marshaled by Kerry would be unlikely to reduce greenhouse gas, these people said, unless it is backed up by major restrictions and much deeper analytical work. 

Backlash from people familiar with the carbon credit framework comes before Kerry has even officially unveiled the program, dubbed the “Energy Transition Accelerator.” The launch, expected to come in a speech on Wednesday in Sharm el-Sheikh at COP27, will establish the US climate envoy as the latest leading figure to attempt to harness the private sector through carbon credits. Unlike other such efforts — including one initiative that sets tangible, verifiable purchase commitments for ultra-green products — experts in carbon markets see Kerry’s program as a significant risk because it could end up rewarding companies that pay to back projects that do nothing to keep greenhouse gas out of the atmosphere.

“Any proposal that lacks a detailed plan for how to address this well-documented problem isn't serious and shouldn't be treated as such,” said Danny Cullenward, a policy director with Carbon Plan, a nonprofit group that analyzes climate solutions.

Kerry’s approach would allow companies to claim carbon credits for investing in developing countries’ projects to build resilient infrastructure to withstand heat and storms or to decarbonize power grids, such as by speeding the deployment of renewables, accelerating the retirement of coal plants and building power storage.

The credits would be tied to decarbonization plans put forward by national and subnational governments, a requirement meant to ensure credits aren’t awarded for installing renewable projects in a country that’s continuing to build new coal plants nearby. Oil, gas and coal companies also would be barred from participating in the initiative, according to a briefing document seen by Bloomberg Green and other people familiar with the plan. Major details — including how to credibly forecast countries’ future greenhouse gas emissions and verify that projects are actually reducing that output beyond what would have happened anyway — have not yet been worked out.

Kerry’s framework is meant to be fleshed out over the next year, in consultation with a wide range of stakeholders that include governments, companies and standard-setting organizations, said one person familiar with the matter who asked not to be named because the proposal hadn’t yet been announced.

People familiar with the proposal said it calls for the World Bank Group to verify the legitimacy of the claimed carbon dioxide reductions for individual projects and credits. But the World Bank has no expertise in this area, and existing third-party verifiers such as Verra and Gold Standard have decided not to recognize carbon credits linked to new renewable energy projects in all but the poorest countries.

This shift to break the link between renewable projects and carbon offsets comes as the plunging cost of wind and solar power make those technologies the cheapest sources of electricity in many parts of the world. The risk is that credits are awarded for decarbonization efforts and greenhouse gas cuts that would have happened without the financial incentive provided by carbon credits. This is a particularly significant concern without deep analytical work to accurately forecast countries’ carbon footprints amid rapidly evolving electricity sectors.

“In order for this scheme to work, a market regulator needs to accurately predict host governments' emissions many years into the future. Otherwise the program risks giving false credit to business-as-usual outcomes,” said Cullenward. “Developing and vetting those methods takes years, and none so far has worked at scale.”

The effort is already drawing criticism from European nations and some environmental advocacy groups who say what’s needed now are absolute emission reductions — not new voluntary carbon markets like those proposed by Kerry. A senior European official said there are “massive concerns” the credits will go to support renewable projects that don’t need to be funded in this way.

Some environmental advocates who are optimistic about the Kerry initiative say it could unlock a stream of investment to developing nations that’s still hindered as investors shy away from risk. “The cost of renewables are coming down but many of these countries are still having challenges accessing capital to be able to invest in those renewables,” said Angela Churie Kallhauge, executive vice president for impact at the Environmental Defense Fund. “So this is an opportunity to scale up some of the investments toward that."

Ani Dasgupta, head of the World Reaources Institute, expressed appreciation for the State Department’s pursuit of “an innovative approach to scaling up investments and private capital to accelerate developing countries' transition to cleaner energy.” However, he said it’s essential to  avoid the greenwashing tied to past offsets: “This process has to ensure guardrails for how companies participate and that the funding advances developing countries’ own priorities for a just energy transition.”

Critics pointed out the way Kerry’s plan echoes an earlier carbon offset program under the UN Kyoto Protocol. Under that approach, known as the clean development mechanism, baseline emissions models for former Soviet countries were unrealistically high, enabling them to trade in reductions that were little more than a mirage. The challenge is arguably much greater now, with a dynamic electricity market and rapid deployment and lowering costs for wind and solar power that are outpacing predictions.

“How would a scheme to avoid future electricity sector emissions avoid this outcome in an environment where technology costs are falling like a rock and taking emissions outlooks with them?” Cullenward  said. “What about this time will be different?”

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