One of the most common criticisms of the emerging carbon market is that carbon credits are far too ephemeral a commodity to trade with any confidence.
In essence, all that is being exchanged is a vague commitment that some carbon emissions somewhere have not been released, or in the case of cap-and-trade only a certain quantity of emissions have been released. It is a whole market built on negatives which, as with all negatives, can not be proven.
And yet while this criticism has a certain validity it conveniently ignores the fact that much of the supposedly more tangible financial markets are similar dependent on the confidence that is held in otherwise worthless commodities. A carbon credit may be essentially a contractual agreement not to pollute, but cheques and even bank notes are just contracts too – albeit ones people have an enormous confidence in being honoured.
The problem is not with the concept of a carbon market, particularly given that evidence is beginning to emerge that the approach is working.
The issue with carbon credits, or indeed any attempt to establish carbon a currency, is in establishing confidence in that commodity.
The primary means put forward to establish this confidence is through the development of international standards. As more and more carbon markets emerge - and this week alone we've seen further developments in planned cap-and-trade mechanisms in Japan, the US and the UK - it is hoped that standardised approaches for measuring carbon and registering and trading credits will be imposed, providing rock solid foundations for this new commodity class.
Equally, the emergence of such standards should enable software solutions for measuring and monitoring carbon emissions - such as those unveiled this week by IBM and EPS - to become pervasive, further increasing confidence in the provenance of carbon credits and the accuracy of carbon footprinting initiatives such as that currently being piloted by Tesco.
However, while such standards and technologies will undoubtedly help build confidence in the carbon market an equally important component of the credibility building process appears to be being largely ignored by many business and political leaders – namely enforcement.
Standards are only as good as the enforcement and auditing mechanisms that accompany them and on this topic there has been a resounding silence from many of those organisations championing the emerging carbon market.
Environment minister Phil Woolas hinted at the opportunity presented by the need for enforcement when, speaking at this week's Corporate Climate Response conference in London, he outlined his ambition to make London the global capital for carbon auditing services.
However, his own department's plans to expand carbon trading in the UK through the Carbon Reduction Commitment appear curiously averse to establishing strong enforcement mechanisms, promising a light touch approach that while keeping administrative costs down also sounds like a tempting invitation for firms to under report their carbon data.
I don't wish to strike any further blows to confidence in the carbon market, but I imagine that fraudsters are currently watching developments in the global sector avidly. Similarly, with customers increasingly demanding that firms boast strong environmental credentials it has to be accepted that many suppliers will have a vested interest in underreporting their carbon data.
You just need to find yourself with a counterfeit £10 note in your hand to know that you can never establish complete confidence in any market, but until the enforcement and fraud detection mechanisms in the carbon market are at least as sophisticated as those in the financial markets then the concept of carbon as a currency will struggle to gain traction.
Right, I'm off to try and work out how on earth you could convince people to welcome a man made tornado to their community.
Have a good weekend,
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