Carbon and nature markets not perfect, but should not be dismissed: WEF panel 

SINGAPORE – Efforts to price carbon and nature to tackle global climate and biodiversity crises may not be perfect solutions, but these mechanisms should be strengthened and improved on, instead of being dismissed altogether.

Nature and carbon markets could potentially bring in new sources of financing, mainly from the private sector, to tackle severely underfunded natural and climate crises. 

This key message emerged from a panel discussion on nature markets, held on Jan 21 at

the World Economic Forum (WEF) in Davos

, Switzerland, during which panellists discussed the benefits and shortcomings of commodifying natural assets like water and biodiversity.

Organised by the WEF and developed in collaboration with The Straits Times, the discussion by the four-person panel, which included Singapore President Tharman Shanmugaratnam, was moderated by ST editor Jaime Ho. 

Panellist Sherry Madera said companies could better identify financial risks and opportunities if the impact of climate and nature crises on them, and vice versa, was quantified. 

Climate change-fuelled extreme weather events, for example, could pose a risk to a company’s physical assets, such as factories, while the loss of nature could compromise the natural services provided by healthy ecosystems, such as water purification and pollination. 

The bottom line is that companies cannot manage what they cannot measure.

The language of ethics and environmentalism is important in getting people to understand what change is needed, said Ms Madera, the chief executive of CDP, a global firm that manages an environmental disclosure system for companies, cities, states and regions.

“But (solving these issues) is an economic question. And if we can place it in the world of economics, that’s where we can see some possible future.”

Tackling climate change or stopping nature loss is an expensive endeavour. The International Monetary Fund estimated in January 2024 that the Asia-Pacific region alone faces a shortfall of at least US$800 billion (S$1.1 trillion) in climate financing, after accounting for existing sources such as government funding. Climate finance could go to efforts to replace a fossil fuel plant with a renewable energy facility, for instance. 

As for the funds needed to stop environmental degradation, the UN has estimated that a biodiversity funding gap of US$700 billion needs to be plugged every year. This includes ending harmful financial schemes that subsidise the destruction of nature – such as those that incentivise overfishing – and bringing in new funds for establishing protected areas.

Carbon and nature markets are increasingly considered vehicles to raise new funds from the private sector for such purposes. 

In the carbon market, for example, one carbon credit represents one tonne of planet-warming carbon dioxide that is either removed from the atmosphere, such as through a reforestation project, or prevented from being released, such as by saving a forest from the axe. 

Companies can buy these credits to meet their climate change targets, thus contributing to efforts such as nature’s restoration.

But the carbon market has also been roiled by scandal.

In early 2023, The Guardian news outlet reported that many rainforest carbon credits did not have any real environmental benefits. Other critics have pointed out that some projects, if not executed in partnership with indigenous communities living on the land, could compromise the rights of these people. 

Such problems are why Mr Mads Christensen, executive director of environmental group Greenpeace International, said he was sceptical of the viability of market-based solutions.

Mr Christensen, who was also on the panel, said: “The commodification of nature, driven by short-term financial considerations, risks deepening the problems we are facing.”

He noted that nature is highly complex, with many different dimensions that cannot all be captured in the data. “I think there is a real risk that nature markets will delay real action, which is what we have seen for carbon,” he said. 

Some critics of the carbon market have pointed out that credits merely offer polluters the chance to offset their emissions, without any real reduction in overall emissions.

Among the three markets, the carbon credit market is the most developed, compared with biodiversity credits and water credits.  

The still-nascent biodiversity and water credit markets also aim – eventually – to incentivise conservation efforts by allowing companies to purchase credits representing measurable benefits to water resources or biodiversity.

Another panellist, Mr Cenk Alper, chief executive of Turkey-headquartered Sabanci Holding, which has subsidiaries in various sectors, including banking, energy and climate, noted that there were many difficulties in trying to integrate the three markets.

For example, the currency of carbon is global in nature. One tonne of carbon dioxide emitted from a factory on Jurong Island has the same warming effect as one tonne of carbon dioxide emitted from smoke stacks in China or Texas.

But this is not the case for water or biodiversity, where benefits are more local, Mr Alper noted.

Still, he said that challenges aside, the cost of inaction was extremely high, and governments could do more by increasing taxes on emissions-intensive activities.

According to President Tharman, the political economy of climate action is complex.

“You are dealing with a problem where resolving the problem will give benefits quite some ways down the road,” he noted. “You get some immediate benefits, but the most important ones come decades from now, but you have to start paying a cost today.” 

Describing this inaction as a “wicked problem” – a term used in academic circles to describe something that is difficult to resolve because of incomplete, interdependent or changing requirements – Mr Tharman said: “We’ve got to not compare an ideal solution with an imperfect solution, but to compare all the imperfects with one another.”

He suggested that instead of developing separate accounting systems for water or biodiversity credits, these could be “stapled” on to carbon credits. 

“We don’t yet have precise quantitative ways of assessing biodiversity benefits, in a way that can be compared across different projects and different regions and geographies. In other words, there’s no common currency,” he added. 

Saving rhinoceros populations in Africa, for instance, cannot be directly compared with saving coral reefs in Indonesia.

But one possible solution is to couple carbon credits with biodiversity co-benefits. This “stapling” has raised the premium of some carbon credits, he said. 

Responding to Mr Christensen’s suggestion that governmental action and regulations, and not market-based mechanisms, are key to tackling climate change and stopping nature loss, Mr Tharman acknowledged that the “fundamental solutions” lie in public policy, pricing and regulation. 

But the world will “take a great risk” if it were to bank solely on public policy, given the fragility of the political economy, he noted. 

“We need better third-party verifiers. We need independent civil society casting a very careful eye on what is going on. We need leading businesses, high-integrity businesses, to show the way.

“We take a large risk if we simply argue for the right thing to be done, knowing full well that the right thing has taken a very long time for political systems, ordinary people, to recognise that it needs to be done.”