Levente Tóth, Founder of urbaniqe, published an article on LinkedIn, where he reflected on the most common criticism about our green financing solution. Below you can read the English translation of the original post that you can read in Hungarian by clicking here.
It's an old truth that it's difficult to stand in the middle of two opposing viewpoints, and my startup finds itself in precisely that scenario. In my previous article, I addressed criticisms of a green startup's business communications from climate sceptics. However, there is another side to the coin. There is also scratchy feedback from green fundamentalists, who tend to look for "greenwashing" in anything that has a business motive as its goal. Implying that business and profit are sinful concepts in the context of climate change. I would now like to address them and provide adequate answers to some of the questions raised.
"Electro-mobility is a dead end because it has a significant carbon footprint!"
Indeed, electromobility cannot compete with public transport or micromobility in terms of emissions per passenger-kilometre: the bike is unbeatable. However, these modes of transport fulfill only a small part of everyday mobility needs. We need to look at what other mode of transport electrification is replacing: internal combustion vehicles.
The green economy is based on the principle of cyclicality, so different life cycles can be identified for electric cars: production, use, recycling. It is true that their production and the recycling of their batteries release a significant amount of carbon dioxide. The EU places the responsibility for these life cycles on the manufacturer or distributor: they bear the cost of offsetting the negative environmental impacts. This represents a significant financial risk for them and is built into their prices. This is one of the reasons why electric cars are still significantly more expensive than their combustion counterparts in the same category. If we as consumers pay this price, we have also indirectly paid for the offsetting of the emissions of these stages, so we can focus on use. It is precisely to reduce this significant price disadvantage that green financing through the issuance of credits on the voluntary carbon market, based on verifiable carbon gains from electrification as a technology change, is both necessary and possible.
The use of electric cars is not necessarily completely carbon-free either, since the electricity they charge has a carbon intensity (so it is net zero only when charged from certified green electricity), but it matters how much: the carbon footprint of electric cars is significantly lower than the emissions of the internal combustion powertrains they generate, so the uptake of the technology should be encouraged. The taxonomy of green finance recognises electrification as a green technology with net zero potential, so that regular carbon credits can be generated from business investment in it (1).
"The voluntary carbon market is a hotbed of fraud!"
This criticism has a basis in reality: the history of the voluntary carbon market over the last fifteen years is unfortunately full of negative examples. However, this summary oversimplifies the issue and, like all generalisations, undermines the integrity and business interests of the honest majority. I will quickly explain why. The abuses have mostly stemmed from the fact that the carbon market, by its voluntary logic, is unregulated, driven primarily by general principles of civil law and integrity. In the absence of regulation, many segments of the market have become the domain of unscrupulous fortune hunters, particularly, but not exclusively, in relation to agricultural and forestry projects. Frequently, genuine green investments and measurable emission reductions, i.e. quasi-unsecured carbon credits, have appeared on the market, or the real carbon gains of a green investment have been repeatedly offset, which activities have damaged market trust.
Therefore, the voluntary carbon market started a strong self-cleaning process a few years ago. The Integrity Council of the Voluntary Carbon Market created and published the bible of credit issuance: the Core Carbon Principles (2). These set out the criteria for quality carbon credits, protecting the interests of both market buyers and honest issuers when appropriate. As a result, the market is now effectively fragmented: carbon credits are traded in a wide price band based on the transparency and quality assurance of the underlying project. The 'junk' category has remained in the range of a few dollars, while the average price of quality carbon credits from transparent European projects has risen steeply, reaching $25 in 2023 (3), and is expected to continue to rise in the future.
High integrity credits no longer carry significant risk. We issue such high quality credits by aggregating green investments in fleet electrification by well-known European leasing companies, based on real, transparently demonstrated and verified carbon gains. These quality carbon credits are also sought by major carbon market buyers, who consider the transparency of the underlying project and the quality of the credit to be more important factors than price (4 ), as they cannot afford to be suspected of greenwashing.
"Only the carbon credits from the removal projects are worth anything, everything else is greenwashing!"
Based on the source project, we can distinguish three different types of carbon credits. In simple terms, mitigation projects (e.g. electrification) that reduce carbon emissions from a historical baseline are verified as reduction projects, and from this a reduction credit is generated. Avoidance projects (e.g. forest protection) typically do not reduce nature's ability to absorb carbon, resulting in an avoidance credit. Removal projects, on the other hand, reduce the amount of greenhouse gases already in the atmosphere by absorbing them either technologically (e.g. absorption) or naturally (e.g. reforestation) and storing them over the long term, thus generating removal credits (5).
Removal credits represent only 3% of the carbon market supply today, and indeed, these projects should be supported to help us get rid of the harmful accumulation of carbon dioxide in the atmosphere by sequestering it. But supporting them should not mean simultaneously branding the reduction (22%) and avoidance (75%) credits that make up the vast majority of the market as uniformly green washing. Unfortunately, the draft legislation to regulate the quality of carbon credits (6), which will be submitted to the European Parliament in 2022, reflects the same approach as the one cited above: it only intends to recognise the withdrawal credits in legislation. The aim of the regulation is to utilize legal quality assurance to substantially drive up the price of carbon credits governed by the regulation, thereby encourage the initiation of underlying green projects.
One problem with this is that an exclusive removel focus discourages green investors in the second segment, i.e. high integrity abatement projects, whose abatement credits may miss out on the expected significant increase in regulated carbon market prices. Reduction credits are necessarily always backed by green investment and properly verified carbon emission reductions. Therefore, neither their issuance nor their purchase can be considered as greenwashing, and their inclusion in the forthcoming regulation is justified. On the other hand, there is also a valid demand for precisely defining quality criteria in legislation, especially in the third segment, concerning avoidance credits, which are subject to the most varied interpretations, to rid the carbon market once and for all of fraudsters and charlatans. This segment unmistakably calls for regulation!
It is no coincidence that the legislation has not yet been passed, and that behind the scenes in Brussels, a realistic, market-driven green position is clashing with principled green fundamentalism. Consequently, I advocate for comprehensive regulation of carbon market quality across all three segments, as this is the sole means of establishing a vast, cohesive and transparent carbon market capable of driving the green transition.
(1) https://www2.deloitte.com/content/dam/Deloitte/global/Documents/deloitte-financing-the-green-energy-transition-report-2023.pdf
(2) https://icvcm.org/the-core-carbon-principles/
(3) https://www.ecosystemmarketplace.com/publications/state-of-the-voluntary-carbon-market-report-2023/
(4) https://www.bcg.com/publications/2023/why-vcm-buyers-will-pay-for-quality
(5) https://www.carbon-direct.com/insights/how-do-carbon-credits-actually-work-removal-reduction-and-avoidance-credits-explained
(6) https://eur-lex.europa.eu/resource.html?uri=cellar:60d407c8-7164-11ed-9887-01aa75ed71a1.0009.02/DOC_1&format=PDF
Cover picture: Patrick Rogers
