Kathleen McAfee – Climate Finance and Carbon Colonialism

If “selling nature” becomes the basis of climate finance, global South countries will have to choose between repeating history and coping with the climate crisis on their own.

Kathleen McAfee is Professor for International Relations at San Francisco State University

Cross-posted from the Clara Website



To give the world a chance to stop catastrophic temperature rise, the global North must phase out fossil fuels and help the global South to do the same. Countries whose industries have caused the most climate damage must aid those who have caused the least, yet are hit hardest by it. This obligation, recognized by most governments at the first Earth Summit 31 years ago, has been reiterated in decisions under the global biodiversity (CBD) and climate (UNFCCC) treaties.

So far, the richer countries have failed to pay. They have released just a fraction of the $100 billion in annual aid they promised in 2009 for climate mitigation, adaptation and low-carbon development in the global South. U.S. negotiators have tried to block treaty language reconfirming “common but differentiated responsibilities”, the principle behind the original pledge of North-to-South financing. The 2015 Paris Agreement Article 9 still says wealthier countries should help poorer ones, but in the years since Paris there have been further attacks on the principles of equity and the practice of multilateralism in climate action, with very little public climate finance flowing.

At COP27 last year, global-South countries won an agreement to establish a Loss and Damage Fund to compensate vulnerable countries for the disproportionate climate harms they suffer, but no specific amounts or timetables were agreed upon. The US climate envoy insists that any aid the US might give has “nothing to do with compensation and liability”.

Where do those who rightly demand that all countries take climate action expect the resources for that action to come from?

With the Paris Agreement, climate negotiators abandoned the goal, at least for now, of a single carbon budget for the planet that would distribute the burdens of climate action equitably, according to countries’ differing capacities and historic responsibilities. Instead of quantified country targets, with deadlines for emissions reductions and climate aid and penalties for non- compliance, the Paris plan relies on voluntary pledges – Nationally Determined Contributions, or NDCs – and faith in profit-driven flows of investments from the global North to the South.

This is how carbon markets and the practice of offsetting came into the UNFCCC negotiations.

About Carbon Credits

In carbon markets, environmental assets – in particular, the capacity of ecosystems to sequester CO2 – are represented as carbon credits that can be sold in exchange for environmental debits. Those environmental debits are almost always in the form of continued greenhouse gas emissions. Market advocates see international carbon trading as a way to mobilize capital for climate aid by enabling private investors and firms to buy cost-saving offsets, i.e., by making conservation and climate-change mitigation profitable.

Carbon trading across borders already takes place through a variety of privately-managed arrangements known as the Voluntary carbon market (VCM). (This is distinct from government- run carbon markets where companies trade credits to help them comply with laws that limit their emissions.) Most VCM carbon credits are generated by projects that protect forests or produce cleaner energy: sales of the credits pay for the projects. Project registries such as Verra issue credits in amounts based on estimates of how much emissions have been prevented or removed from the atmosphere by a project they approve. VCM credits may be sold directly to private corporations or to credit brokers, or to those who speculate in carbon-credit prices.

Most projects that produce carbon credits for international sale are “nature-based” and are located in the global South. Mainstream environmental economists believe it is more economically efficient to set aside ecosystems there, such as forests, farmlands, and wetlands, to store the world’s fossil-fuel pollution. Land prices, wages, and material standards of living are lower in the global South than in industrialized regions, and consequently, climate mitigation can be carried out there at less monetary cost, they say.

This makes conservation look like a bargain for the planet on paper. However, the ultimate buyers of carbon credits typically use them as offsets that compensate – in theory – for the emissions they continue to dump into the planet’s dwindling carbon sinks. Since carbon credits are cheap, buying offset credits costs a lot less than reducing a company’s absolute emissions, even while the world races on towards exceeding the 1.5C threshold.

That is how carbon marketeers imagine climate finance: businesses acting in self-interest, in accord with their obligation to maximize the value of their companies’ shares, will profitably transfer billions from the North for climate action in the South. In the magical market world where these analysts dwell, the value of tradable credits is based on and depends upon the economic inequality between the global South and North.

Selling nature to save it

Market environmentalism – managing nature as a collection of commodities – is not a new idea. For three decades, “selling nature to save it” has been at the heart of global environmental policy as it has been shaped by prominent conservation organizations, some UN agencies, the World Bank, and the US and EU governments.

Credits defined under Article 6.4 of the Paris Agreement would create another new brand of credits: UNFCCC-approved A6.4ERs (emission reduction units). These can then be sold to corporations or charities, as well as to governments. Like most other carbon credits, A6.4ERs would be a proxy for purported greenhouse-gas reductions that could be traded through the VCM and used for offsetting. (Under Paris Article 6.2, climate negotiators have conjured yet another kind of credit, Internationally Transferred Mitigation Outcomes or ITMOs, that can be traded between countries but cannot be used as offsets.)

No gain against global warming results directly from offsetting deals. Even if the quantity of credits generated by a project were based on accurate estimates of emissions removed, prevented, or postponed by that project – which they almost never are – the net result of an offsetting transaction is, at best, no increase in CO2 in the atmosphere. But no reduction either. Offsetting merely shifts the climate burden from one place and one set of people to another.

Conservation financed by carbon-credits exports is not even a means of slowing deforestation. Carbon credit sale prices cannot compete with the more profitable enterprises that drive deforestation – soy, palm oil, mineral and biomass mining, and ranching – nor can they counteract the effects of the subsidies that many countries provide to keep these forest-killing extractive industries in business. In a world of globalized “free trade”, where land is for sale and profitability determines how land is used, potential earnings from soy or palm oil exports will likely outcompete any short-term economic advantages of buying carbon credits for investors in the world’s forested commodity frontiers.

Approval of Article 6.4 will nevertheless be cheered as a boost to the struggling voluntary carbon market by its advocates, whose predictions of a multi-billion dollar carbon market have not yet come to pass. The VCM saw a growth spurt in 2019-2021, reaching nearly $2B in trades, as thousands of companies bought offsets to back public claims that they had achieved or would soon achieve net-zero carbon emissions. Even while the UN Secretary General was warning of massive greenwashing by carbon projects, offsets became “catnip for commodity traders”.

Then in 2022, a cascade of press reports confirmed what academic studies, my own among many others, have been warning – that most carbon credits are worthless for slowing climate change. Several major firms were sued by environmentalists, governments, or their own shareholders for exaggerating the climate benefits of offsets. With rising concerns about legal liabilities and scrutiny by financial regulators, many companies stopped buying carbon credits and VCM growth slowed to a crawl. Some headlines in the financial press warned that carbon markets could soon collapse.

With the future of carbon markets and the value of carbon credits in doubt, players in the VCM – credit-certifying companies like Verra, traders, speculators, and other intermediaries – will welcome the prospect of new, remunerative opportunities sanctioned under Paris Article 6.4. Corporations wary of buying carbon credits may be reassured that the new UN standards for Article 6 can make the carbon market more honest and shield investors from both legal liabilities and bad publicity.

The South is aiding the North

All along, the world’s would-be developing countries were given the same advice by mainstream economists, rich-country aid agencies, and international development banks: “export your way out of poverty”. Use your “comparative advantages“ – rich soils, mineral deposits, cheap labor – and sell your products on the global market. Efforts by global South states to bargain collectively for better prices by forming commodity cartels have been crushed as obstacles to free trade.

Now, there is a new category of export commodities – the capacities of ecosystems in the global South to absorb the world’s wastes. Are carbon credits from forest conservation and other “nature-based solutions” the latest miracle crop? Can carbon- and biodiversity-credit exports do more for cash-strapped counties today than the earlier rounds of commodity exports – human beings, cotton, sugar, bauxite, rubber, coffee, genetic resources, etc. – did in the past?

We already have 20 years of recent experience with exports of carbon-credit commodities from forest conservation projects under the rubric of Reduced Emissions from Deforestation and (forest) Degradation (REDD+). The majority of REDD+ projects have been designed to set aside forests or wetlands as carbon sinks and have been financed by sales of offsets through the voluntary carbon market. But these schemes have transferred very little to the countries and communities that provide the offsets. Why?

First, buyers of carbon credits have a lot more bargaining power than sellers. With no global carbon cap or budget under the UNFCCC and few national laws limiting greenhouse gases, companies are under little pressure to actually reduce their emissions. The loose rules of the voluntary markets, designed to attract private investors, have created a glut of cheap commodities. Although some “premium” carbon credits cost more, offset prices still average less than $7 per ton of CO2.

Second, the VCM is a field of business in itself, comprising the private registries that issue carbon credits, for-profit companies and consultants who certify that credits are paying for actual climate gains, at least on paper, plus brokers, speculators, and dealers in insurance and derivatives. By the time the players along the carbon-credit commodity chain have taken their cuts, not much is left for the countries and communities that sacrifice use of their territories to make way for carbon projects.

Where did the reported $2 billion in VCM trades in 2021 go? No one really knows, since the terms of carbon-credit sales are commonly kept secret, but it appears that very little money from carbon-credit exports has been transferred to governments, local NGOs, or the indigenous  communities and other rural land users who have been required by offset projects to give up land and forest resources they depend upon. Instead of earning net income for the countries and communities that host them, many REDD+ projects have been subsidized by governments, charities, or the communities that are the projects’ intended beneficiaries.

Third, the voluntary carbon market is voluntary, in keeping with the 18th-century economic maxim that private actors, following their own self-interest, make the best decisions for society. Few companies will pay higher prices for offsets if those purchases hurt their bottom line. Initiatives led by investment bankers and conservation organizations have tried to tighten the criteria by which carbon credits are assessed, so that “junk” offsets can be filtered out and the reputation of the carbon market can be saved. But each time stronger standards that would raise the cost of offsetting have been proposed, VCM sponsors have held back – out of fear that if credit prices are too high, the multi-billion market they envision may not materialize.

Even if “quality” offsets based on much stronger standards become available, less scrupulous companies can put their own brands of credits on the market. Governments can do this, too, as some are already doing. This adds more credits to a market that is already oversupplied. That is good news for CEOs and speculators who shop for the cheapest offsets, or the almost-cheapest “premium” credits, but it creates the conditions for yet another race to the bottom among countries hoping to cash in on the latest tropical export commodity.

Dispossession by decarbonization?

Betting on carbon credits will continue to be a very risky choice for sellers as well as for buyers. Will governments that host offset-generating projects be held liable to project failures? Will companies win lawsuits against credit sellers or against governments when projects misrepresent climate-mitigation results? Will governments be prevented from using the reported results of offset-generating projects in their countries to count as progress toward fulfilling its own NDC?

As technology, oil, and airline companies lay claim to the carbon-sequestration and other ecosystem services produced by distant landscapes to meet their own climate and public-relations goals, the government and communities that receive offset payments for carbon stored in their terrains are ceding to the offset buyers their own emissions rights: their ability to make use of the territories now designated as carbon sinks for their own survival and development.

Under colonialism, lands, waters, and farmlands were seized by force and economies were restructured to serve the needs of others. Will global-South governments again give up control of much of their territories, exporting their own development futures in exchange for short-term infusions of cash? If “selling nature” becomes the basis of climate finance, global South countries will have to choose between repeating history and coping with the climate crisis on their own. Neither will deliver the needed global climate action.

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