The United States and the European Union (EU) are usually close allies at the world’s annual climate negotiations — but according to internal documents obtained by The Lever, tensions have arisen between the two blocs in the run-up to this year’s summit. As world leaders head to Dubai, United Arab Emirates, this week, the U.S. is undermining efforts to set stringent standards for a new global carbon market that would allow polluters to help fund carbon-reduction efforts to compensate for their emissions. 

According to the Nov. 8 background paper, written by an executive working group in the Council of the European Union, the U.S. is backing a largely unregulated, voluntary system of trading emission offsets, even though such voluntary schemes have been plagued by questionable climate benefits, harms to indigenous communities, and outright corruption. The authors write, “In our view, accepting a standard based on the [voluntary carbon market] may hinder the independence and trust that compliance carbon markets need to contribute towards the achievement of international climate goals.”

Experts say the U.S. is going this route, rather than backing a more stringent United Nations (U.N.)-regulated carbon market favored by the EU and other stakeholders, because the Biden administration is hoping private-sector climate solutions and corporate responsibility will help gloss over the fact that the country is continuing to break records for fossil fuel production and is the biggest laggard in terms of paying its fair share of finance for the emissions it has wrought on the world.

“The U.S. government has trouble delivering climate finance and now basically sees private investment, including [through] carbon markets, as an opportunity to showcase that they are delivering climate finance,” said Sven Harmeling, international climate policy coordinator for the non-profit coalition Climate Action Network Europe. “But we know that [money via carbon markets] is not climate finance. Climate finance means public funding.”

For the first time in his presidency, President Joe Biden will not be attending the annual climate summit.

In response to a request for comment, the U.S. delegation to the summit declined to answer questions on the record.

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An Emissions Reduction Strategy “That Risks Backfiring”

In 1992, countries around the world signed the U.N.’s first climate change treaty to coordinate global action to tackle the climate crisis. In 2015, after two decades without meaningful action, 195 participating countries signed the Paris Agreement, further hashing out details of climate action and the necessity to limit global warming to well below 2 degrees celsius and pursue efforts to limit the temperature increase to 1.5 degrees

At this year’s annual climate talks from Nov. 30 to Dec. 12 in Dubai, known by the acronym COP28, negotiations are focused on a handful of core themes like the clean energy transition, slashing carbon emissions, climate finance from rich countries to support climate action in poorer countries, and assessing the progress of global climate action efforts so far. Another key task is to establish an international carbon market governed by the U.N. 

In recent months, the U.N.’s supervisory body has been setting guidelines to ensure such an international carbon market “benefits the environment, host countries, and buyers alike.” Their recommendations are intended to govern the market, and will be discussed at COP28. 

Carbon markets allow companies, individuals, and countries to buy credits associated with carbon-reduction efforts to compensate for their emissions. For example, highly polluting companies in the manufacturing sector or the aviation industry can invest in forest conservation and use the credits from this investment — with prices set per ton — to offset their emissions. Countries can do this, too: Switzerland has signed bilateral deals with Ghana and Vanuatu to purchase carbon credits to meet its international emission reduction goals.

There are two types of carbon markets: voluntary markets, in which companies and organizations negotiate deals, and compliance markets that are government mandated. California’s cap-and-trade program, a compliance market framework, sets a limit on industries’ greenhouse gas emissions, but allows them to trade in case they exceed the limit. 

Neither market is ideally regulated at present (concerns have been raised, for example, about the efficacy of California’s program). One overarching worry is that carbon credits are often made through compensatory carbon-sink projects like reforestation projects that can rob agency from the people who live there.

But voluntary markets are considered by many to be especially inadequate, since they rely on corporate responsibility to decarbonize their industries.

Existing standards for the voluntary market are currently designed by self-appointed bodies like the Integrity Council for the Voluntary Carbon Market and the Voluntary Carbon Markets Integrity Initiative. These standards are “full of loopholes,” said Avantika Goswami, program manager of climate change projects at India’s Centre for Science and Environment. She explained that the voluntary carbon market needs “regulation, a public and independently managed registry, and high scrutiny of projects to determine integrity and benefit-sharing with communities on the ground.” 

A recent investigation by the Centre for Science and Environment found that voluntary markets in India failed on two counts: Emission reduction outcomes were either inflated or almost nonexistent, and revenue from the sale of carbon credits wasn’t shared with local communities. Researchers also found that many of the carbon-offset projects lacked transparency, and that some community members who were involved in these projects had no clue what carbon credits were.

Two months ago, research from University of California, Berkeley on voluntary markets raised additional concerns about inflated credit values and the potential marginalization of forest-dependent communities. Reporting has found that the voluntary market’s largest firm sold millions of credits for carbon reductions that didn’t exist. Meanwhile, private demand for these voluntary credits has declined, and the credit price has plummeted

Despite its shortcomings, the unregulated carbon market boomed to a value of $2 billion per year in 2021. 

Gilles Dufrasne, policy lead on global carbon markets at Belgium-based nonprofit research organization Carbon Market Watch, said carbon credits could be a way for companies to finance climate action beyond their own production processes, but shouldn’t be a substitute for internal emission reductions.

“Allowing loose rules that will incentivize the purchase of carbon credits at any cost is a strategy that risks backfiring, when companies end up investing a lot of money in credits that do not deliver real emission reductions, while failing to decarbonize their own activities.”

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Internal Divisions

The new international carbon market that world leaders are negotiating at COP28 is a compliance framework with legally mandated limits.

The finalization of these rules and their full implementation is “imperative for COP28,” said Trishant Dev, program officer of climate change projects at India’s Centre for Science and Environment and the lead author of the study that exposed loopholes in the way voluntary carbon markets are currently functioning in India.

But instead of seeking guardrails for a global carbon market, the U.S. seems to be moving in the opposite direction. 

According to the Nov. 8 memo obtained by The Lever, the Council of the European Union, one of the EU’s two main legislative bodies, warned that at COP28, the U.S. was set to advocate for building on existing voluntary carbon market standards for the international carbon market, as opposed to establishing a new robust framework with stringent standards. 

According to the authors, the EU Council had concerns that such weaker carbon market standards could lead to “over-crediting, disadvantaging host countries and deviating from the pathway necessary to reach the Paris Agreement long-term goals.” They added that the U.S. is promoting the usage of carbon credits without clarifying the accounting rules that could ensure their integrity and transparency, and “pressing hard for a prompt finalization of the guidance, without much concerns for quality/robustness but driving a lot of attention and time to solve their very specific concerns.”

Dufrasne at Carbon Market Watch said the different approaches on a global carbon market reflect how the EU has historically been more active on climate action than the U.S. According to Dufrasne, the European public is putting more pressure on companies to act, compared to the American public. 

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The memo hints at another potential reason that the U.S. is pushing for weaker carbon market regulations: the matter of climate finance, or funding that rich countries pay to poorer countries to help finance climate action, to account for the former’s historically high emissions.

In the last few months, U.S. climate envoy John Kerry, who will be attending the Dubai summit, has said climate action “takes trillions and no government that I know of is ready to put trillions into this on an annual basis”. (Nevermind that billions in U.S. public funding has gone to support foreign military aid in Ukraine alone, or that the effects of climate inaction could cost trillions of dollars per year.) Simultaneously, Kerry has repeatedly emphasized the private sector’s role in the clean energy transition.

A voluntary carbon market could, at least in theory, make it easy to channel money from the American business sector to climate action initiatives by funding projects like forest conservation or development of renewable energy capacity. But as research has demonstrated, the voluntary market suffers from serious integrity and transparency issues. 

The voluntary market is “unregulated, fraudulent, and open to ebbs and flows,” said Goswami at the Centre for Science and Environment. “Committing [to] this market as the tool for [an] energy transition, which requires investment in public goods like renewable energy and transmission infrastructure in developing countries, is like leaving the clean-energy future of the Global South to the whims of an unreliable market.”

Goswami added, “The U.S. cannot let the private sector dictate the scrutiny and oversight in these markets — it must be determined by the multilateral process [at climate negotiations like COP28].”