INTERVIEW: Discord among oversight bodies hurting carbon market advancement: HFW's Zaman

The carbon market is on life support due to slow progress in resolving integrity issues for offsets and ideological differences among oversight groups, which are also choking off much needed decarbonization funding for developing countries, Peter Zaman, Partner with law firm HFW that specializes in the commodities and resources industries, said in an interview.

According to Zaman, market participants are concerned whether the efforts by the Integrity Council for the Voluntary Carbon Market (ICVCM) and Voluntary Carbon Markets Initiative (VCMI) will be accepted by buyers and allow them to return to the market.

The non-profit ICVCM has been tasked with setting high-integrity labels for carbon credits with announcements expected later this year and the VCMI is helping companies strategize the usage of offsets to meet net zero goals.

Even if some of the smaller methodologies for generating carbon credits are approved, there's no volume or liquidity until the main methodologies are approved to get things moving, Zaman said, highlighting the urgency.

"How do people fund themselves until the market demand picks up? Because of this dry patch, where people are not buying, it is affecting the balance sheet of everybody else who's in the delivery supply chain," he said.

Zaman, who advises on carbon related issues, said many industry players in Singapore have shrunk their workforce because of the lack of demand, and there's no assurance that things will be any different by the year-end because demand side concerns haven't fully been addressed.

Additionally, another oversight body called the Science Based Targets initiative (SBTi) has been fundamentally opposed to offsets. SBTi's paper issued in July does not change its historic opposition to the role and use of offsets by corporations and does nothing to change buyer side dynamics, Zaman said.

"So, either you're in the market today desperately clinging to hope for some miracle to change things or you're eventually out of business," he added.

Ideological differences

Even among the oversight bodies, the VCMI requires annual emissions reporting, while the SBTi approach allows companies to wait till the end of their commitment period which could be decades later, until any offsets are needed.

"Logically, corporations won't do both. The two are not necessarily consistent with each other," Zaman said, adding that "the world is divided into two different camps based on your view of the role of carbon offsets in the decarbonization pathway."

"You've got one camp that says without carbon offsets, we have no means of funding the energy transition for poorer countries," he said. The other camp basically says carbon offsetting "just does not work, full stop," he added.

At the same time, supporters of offsets remain divided on issues such as the validity of removals versus reductions. Many stakeholders fail to see the wood for the trees when it comes to the broader goals of financing decarbonization in developing countries, which will have to be resolved if demand has to return, he said.

Zaman said this ideological battle has a ripple effect on Article 6 markets too, as countries end up having polarized views. For instance, the EU does not support Article 6.4 where no distinction is drawn between nature-based and technology-based removals based on their difference in permanence, which resulted in a delay in finalizing Article 6.4 during COP28.

Choking off climate finance

Developing countries cannot take any more debt to fund the energy transition and their governments should be doing everything within their power to incentivize the private sector, including using offsets to cut supply chain emissions, Zaman said.

"But they're not doing that because of the group of people who no longer wish to use carbon markets because, in their view, carbon offset markets, do not work," he said.

Zaman said countries such as Indonesia are also getting caught up in the short-sightedness around domestic carbon markets or Article 6 frameworks. "They were the first out of the box in 2021 to create laws, to bring in place an Article 6 implementation framework. Until today, there isn't a single approved Indonesian Article 6 project," he said.

In the meantime, impacted by their Article 6 positions, these countries missed the boat on funding from carbon offsets when prices were at $21/ton. These forestry avoided deforestation credits now have to be sold at $5/ton, and Indonesia has lost the revenue opportunity on its forestry assets.

Zaman said several of low-income countries, such as Kenya, Zambia, Zimbabwe or Guyana, have different ideas about what Article 6 means, highlighting the environment of disinformation and confusion that has set up Article 6 for failure.

Developing nations are also on the receiving end of other climate policies such as cross border carbon taxes, that are turning into trade wars.

He said the current design of CBAM is very EU-centric and aligned with the design of EU ETS.

So even if an Indonesian steel producer makes efforts to reduce scope 2 emissions by purchasing renewable electricity and renewable energy certificates, or reduce scope 3 emissions by purchasing carbon offsets, it will not meet CBAM's requirements focused on scope 1 emissions.

As a result, countries have not been able to respond to CBAM effectively. So far China and India have adopted a wait-and-see attitude and are developing their own carbon markets, he said.