Escalating geopolitical tensions may give carbon market a key role to play: GenZero

Carbon markets will be most critical when global climate action is fragmented and geopolitical tensions are at their highest, as opposed to a scenario of full climate cooperation when carbon markets are least needed, Singapore's state-owned decarbonization investment platform GenZero said in a report April 12.

GenZero's report described three scenarios for future carbon markets. In the Climate Theocracy scenario, countries will ideally cooperate on climate agendas and agree on a universal set of carbon market's standards. In the Climate Diplomacy scenario, countries would remain ideologically bifurcated but still set some commonly agreed carbon market principles. In the Climate Autonomy scenario, fierce geopolitical standoffs would result in fragmented carbon markets with limited, bilateral collaborations.

In the Climate Diplomacy scenario, economic incentives for carbon trading eventually would overcome political differences and create a common ground, GenZero said in the report.

"By the late 2030s, there is alignment on quality principles between buyers in the West and project developers in the East, enabling carbon markets to bridge the geopolitical gap and facilitate partnerships on high-quality climate solutions," the report showed.

In the Climate Autonomy scenario, the desire for climate action would be influenced by nationalistic tendencies, meaning countries would regard carbon credits as their national assets.

In a way similar to monetizing oil or gold, in this scenario, countries will monetize their carbon assets and prioritize benefits for their own economies, and this may hinder cross-border carbon trading and project investments, the report explained. However, there will still be a desire to leverage the carbon market as a neutral platform for some bilateral collaborations, GenZero pointed out.

Quality vs. Scale

In the most optimistic Climate Theocracy scenario, the carbon market's standards could be harmonized in the early 2030s around a high-quality bar, GenZero said, adding that, in this case, nature conservation and community projects would be unable to realize their full potential.

The focus on quality will divert carbon finance away from projects that can deliver large-scale, cost-effective emission mitigations, such as avoided deforestation projects. Instead, carbon removal projects, such as direct air capture, will be supported, as the emission reductions can be justified easily and will last permanently.

"In the 2030s, these projects [that implement new technologies] are financed through carbon markets, but only a few manage to scale up to their promised potential," the report showed.

"Narrow quality definitions can potentially hinder the development of many carbon project types and the broader carbon markets to incentivize near-term decarbonization," GenZero highlighted in the report.

Despite that, nature-based projects cannot realize permanent emission reductions, forests can stay for decades and support countries and corporates to meet their net-zero 2050 targets, Frederick Teo, CEO of GenZero, explained at the media briefing for this report.

The concept of "permanence," namely whether a project can achieve non-stop, permanent emission reduction, is a highly contentious issue in carbon markets, and has made the consideration of some nature-based projects unfavorable.

These projects can also buy time for developing and commercializing new technologies, he added.

He said the carbon market should establish a mechanism similar to the diamond market. While prices may vary by brands, origin markets and other quality metrics, every ton of carbon credit in separate markets needs to be comparable and fungible, like each carat of diamond.

Teo also highlighted that carbon rating agencies are expected to play a crucial role in assessing the quality variations among different carbon products.

If carbon markets in individual countries can converge regionally or globally, the rating agencies may need to expand the scope of their assessments, he said when asked whether they need to diversify their focuses from voluntary carbon markets to compliance markets.

Platts, part of S&P Global Commodity Insights, assessed nature-based avoidance carbon credit price at $3.75/mtCO2e on April 11.