The general principles of carbon pricing are well-established: CO2 and other GHG emissions are what economists call “externalities”. They mess up our planet for centuries, and damage everyone’s health, life and livelihoods for generations to come. But emitters don’t pay for these damages, so they will emit more than the economically efficient amount of GHGs. Carbon pricing, either through a cap-and-trade system like the EU ETS or a carbon tax, forces emitters to internalise these negative externalities of GHGs. Neat!
When carbon emissions went from being a public cost but private freebie to carrying a private cost, emitters will look for ways to reduce this cost. They can cut their emissions, obviously and desirably, but that’s not the only way to reduce their now private carbon cost. Emitters can also lobby the government for exemptions, like oil refiners in Singapore did last year. Or they can outsource their emissions using carbon credits.
Outsourcing is a tried-and-true method companies use to cut cost, but historically, the main factor has been labour. As companies moved jobs and factories from expensive, rich economies to poorer countries, their GHG emissions were, unintentionally, outsourced too. But some jobs and operations are not so easy to outsource, and many rich countries are now trying to expand their manufacturing base, so there are some limits to how much emissions can be physically outsourced. When carbon pricing becomes a significant cost, companies want a way to outsource their carbon tax liabilities without having to make big changes to their physical operations. As it turns out, carbon credits are the perfect instrument for that.
When Singapore raised its carbon tax to a meaningful level of S$25, the government started allowing companies to offset 5% of their taxable emissions with carbon credits from overseas. Last month, the National Climate Change Secretariat published a draft guidance to encourage companies to buy more carbon credits:
In response to this industry feedback, NCCS, MTI and EnterpriseSG have worked with the Singapore Sustainable Finance Association (SSFA) and industry partners across the carbon credit value chain to draft guidance for companies looking to purchase carbon credits. The guidance:
(a) aligns to approaches that governments have agreed to adopt as buyers of carbon credits under Article 6 of the Paris Agreement, where relevant;
(b) emphasises that carbon credits should have high environmental integrity;
(c) enjoins companies to prioritise all feasible abatement efforts before considering the use of credits to address remaining emissions; and
(d) clarifies that corresponding adjustments do not apply to credits purchased by companies looking to meet their voluntary climate commitments as these credits are not counted towards Nationally Determined Contributions.
Other than the last point on corresponding adjustment, this draft guidance is mostly a re-hash of existing, widely accepted principles and practices long established by other gatekeepers. As a government-issued guidance, it doesn’t say anything about how carbon credit buyers can seek refunds or compensation from deceiving brokers and project developers if the credits they bought turns out to be magic beans.
It does, though, use the phrase “high-quality” nine times. Maybe if you say the magic word enough times, carbon credits will suddenly become real.
An Inconvenient Thought 