The darker shade of green: When carbon markets meet poor governance

LAST October, Sabah state officials inked a controversial US$80 billion carbon trading deal that claims to safeguard over 2 million hectares of jungle in the Malaysian state from logging for the next century. Non-governmental organisations and journalists, however, raised many red flags, including how a significant proportion of the revenue was to go to a shell company in Singapore with no history in carbon trading.

Back in 2012, Cambodian rainforest activist Chut Wutty was shot dead by the military police in an internationally-funded conservation area in the Cardamom Mountains. Right before his murder, Wutty was reportedly taking 2 journalists to see large-scale deforestation that had taken place near a carbon credit-generating hydropower project.

Such stories tend to draw attention and make headlines because they are particularly egregious examples of abuse of the carbon markets. But market participants and industry watchers say there are many other stories that go untold.

The fast-growing nature of the green economy, with markets hungry for green assets, has the potential to be a convenient disguise for dubious deals. And the increasingly popular but highly opaque carbon markets are a case in point.

Carbon credits – which are tradeable certificates that permit holders to emit a certain amount of carbon dioxide – are enjoying a surge in interest as countries and corporations race to fulfil their net-zero pledges.

But the market is marred by a lack of transparency and oversight. Issues that have arisen include the inflation of baselines, resulting in superfluous credits, and “non-additional” projects, which would have taken place even without the additional financial support provided by the sale of carbon credits.

Carbon primetime – and problems – in South-east Asia

In many South-east Asian countries, where overall governance is weak to begin with, the growth of an unregulated carbon market is especially concerning.

A report published in November 2021 by lobby group Forest Trends showed the traded volume of credits from projects in Asia doubling between 2019 and the first 8 months of 2021, from 45.6 metric tons of carbon dioxide equivalent (MtCO2e) to 91.8 MtCO2e.

For perspective, 23.9 MtCO2e of credits were traded in Africa for the first 8 months of 2021, 10 MtCO2e in North America, and 0.8 MtCO2e in Europe.

One potential reason for the huge volumes in Asia is pricing. Although prices of carbon credits in Asia have risen from US$1.8 per ton in 2019 to US$3.34 per ton in 2021, they are still among the lowest globally – second only to Europe, where credits were going at US$2.96 per ton in 2021.

But another potential reason is the huge supply, as governments are motivated to create more carbon credit-generating projects. The report had noted a “massive increase” in forestry and land use credits in the region, from 8.8 MtCO2e in 2020 to 59.9 MtCO2e in 2021 — primarily from Cambodia and Indonesia.

“The government is the partner and the project developer, and the government gets a cut in the carbon credit transactions. There's too much government interest, and you have this highly conflicted role of the state,” Sarah Milne, a lecturer at the Australian National University (ANU), told The Business Times.

Much of Milne’s research has focused on Cambodia, where she has been active as a conservationist, ethnographer, and advocate since 2002. She noted how hydropower dams in the country’s Cardamom Mountains, certified under the Clean Development Mechanism, a United Nations-run carbon offset scheme, triggered extensive logging operations.

“So they get a permit to remove the timber from the reservoir site, but then actually use that permit to do extensive illegal logging. That was a real racket, and they've done it on countless hydropower dams in Cambodia,” Milne said.

The processes required to verify emission reductions for carbon offset projects will not pick up on such “side effects”. “If all you are trying to do is measure some emissions and tick some boxes, you will miss a lot of the social and environmental risks associated with such activities,” she said.

Whistleblowers on the Nature Conservation Project in Sabah have alleged that authorities left indigenous communities in the dark about the deal. Some 25,000 indigenous people live in the state, with an undocumented number on the fringes of the reserves, Al Jazeera reported in February.

In addition to its commitment to award a stunning 30 per cent of its profits – amounting to about US$24 billion – to Singapore-based company Hoch Standard, the contract also included a cancellation clause allowing the company to sell their rights to a third party of their choice without the consent of the Sabah government.

The government, on the other hand, cannot terminate the agreement.

Alex Helan, a researcher with the Rainforest Action Network, expects a rush into land-based carbon offsetting in the emerging regions of Asia, Africa, and Latin America. But these are also places where land tenures and governance systems are often weak and insecure.

“Without appropriate safeguards, many indigenous and local communities could end up being forced off their land. Carbon offseting can also be a smokescreen for avoiding the real and urgent work of slashing emissions across companies and sectors,” he told BT. 

Cost and cultural barriers

The difficulties the region’s carbon markets face are aggravated by barriers to transparency.

Mark Kenber, co-director of the Voluntary Carbon Markets Initiative (VCMI), notes that the costs for proper due diligence could be higher for smaller and poorer countries.

“There needs to be more capacity building to help poorer countries to access the market, and find ways of offering those verification and auditing services in a way that doesn't price them out of the market,” Kenber said.

Jonathan Crook, a policy officer at Carbon Market Watch, which specialises in carbon pricing, said project developers with tighter budgets might also be forced to use standards that are less robust.

Verra and Gold Standard, the 2 most widely used carbon standards, had from January 2020 stopped accepting new renewable energy projects except from the least developed countries — because of the view that such projects have become common practice and credits generated would not then be additional.

Meanwhile, even auditors for the most reputed standards may fall short if they lack local expertise and knowledge, or are unable to communicate with indigenous landowners in their vernacular language, said ANU’s Milne.

Transparency, a crucial puzzle piece

How can South-east Asia, housing some of the world’s most valuable carbon stock, participate in the carbon markets while protecting the interests of local communities and biodiversity? There are no easy answers, but observers BT spoke to said disclosure is a key piece of the puzzle.

More details should be made public — such as benefit-sharing arrangements with stakeholders, as well as how credits have changed hands.

Crook of Carbon Market Watch also suggested that national laws and policies set out a “fixed rate” for benefit-sharing agreements.

He pointed to cases in which brokers have resold credits at higher prices and pocketed most of the premium. “Improving trade price transparency... could help mitigate some of the problems,” he said.

Brice Bohmer, Transparency International’s climate and environment lead, called for independent complaint mechanisms — at both the project level and the international level.

The UN’s Guiding Principles for Business and Human Rights sets out some standards for effective complaint mechanisms. Among other things, they should involve an independent entity, be accessible in different languages and formats, give assurance that complainants will not be in danger, and should not privilege one party over another.

ANU’s Milne said buyers of carbon credits can also push project developers to undertake proper due diligence.

Ethical buyers should be asking for verification reports as well as data on the community, and be prepared to walk away from projects that do not pass muster.

Said Milne: “Buyers need to drive this because local communities often don’t have much of a voice in it, while those auditing projects often have a vested interest to tick the boxes because their primary concern is the carbon.”