In a recently published article, ‘The Carbon Market Can’t Trade: Designing Contracts and Institutions for Carbon Removal Assets’, Marc Roston has tackled the failure of the carbon removal markets operating with certificates to form a carbon asset that can be monitored and ensure the transferability of carbon removal credits. In doing so, he has suggested the adoption of carbon storage leasing to render carbon removals monitorable services that can be delivered within a certain timeframe and enforced.
Key takeaways:
- The tools that are used to represent carbon removal activities do not possess the features of exchangeable assets. Instead, the current carbon removal market is made up of a patchwork of confidential bilateral undertakings to engage in carbon removal activities that cannot be scaled and are shaped by the exigencies of specific transactions.
- The commercial exchanges that are currently being made do not confer ownership of carbon or trigger the emergence of undertakings regarding the continuation of the activities resulting in its removal from the atmosphere. Therefore, the subject matter of the exchanges is not carbon but a non-physical record that is not linked to the state (i.e. carbon removal) it seeks to ensure.
- Carbon removal markets operate without the categorization of removals as duties that should be discharged within a certain timeframe. They function on the basis of past activities, voluntary goals and transparency frameworks incentivizing carbon removal activities without necessitating their monitoring. Accordingly, carbon removal certificates enable the invocation of carbon removal claims rather than demonstrating the realization of permanent carbon removal. In doing so, they enable corporations to showcase that they are tackling climate change, meeting reporting requirements or internal goals, but do not attribute liability for an eventual non-removal. As a result, the participation in today’s carbon removal markets is shaped by anticipated status-related gains rather than responsibility for ensuring the removal of carbon from the atmosphere.
- Carbon removals, by their very nature, do not exhibit the characteristics of goods that can be traded in that they represent a state (i.e. carbon removal) that must be present during a certain timeframe. As a result, they cannot be governed by frameworks established for ordinary goods since they cannot have a sole owner or be undertaken through the realization of single action such as delivery.
- In markets where ordinary goods are exchanged, contracts may be subject to change through the relocation of goods or services. While carbon removal claims may be transferred, the location of the stored carbon remains fixed and cannot be changed as a general rule. As a result, in case of non-performance the buyers of the credit cannot amend the terms of the contract.
- Carbon removal registries have sought to tackle the risk of non-removal through the cancellation of credits, but the pools established for providing insurance are not sufficiently funded, do not implement pricing based on risks and there are no established procedures for having recourse to them.
- If carbon removal claims become enforceable, leasing can entail duties that can be discharged over a certain period of time rather than the completion of a one-off action. In doing so, it would enable the carbon removal credit to become a transferable right and enable right holders to have access to remedies in case of non-performance. The adoption of the leasing model would enable the monitoring and realization of undertakings and create benchmarks that can be used to compare contracts related to different projects and CDR methods.
Read the full paper here: https://academic.oup.com/oocc/article/6/1/kgag003/8501377?login=false