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Certificate Markets Can Help Achieve Sustainability Targets

Boris Lagadinov
Jul 02, 2021

Guidehouse Insights

Corporates are reassessing environmental commodity market options to comply with increasingly ambitious greenhouse gas (GHG) reduction targets. These targets, often set by the companies themselves, have accelerated the search for solutions toward a net-zero economy. In this race to zero, environmental commodities are expected to play an important role. High profile market support in the run-up to the next United Nations Climate Change Conference as well as the Paris Agreement are also creating expectations for growth in certificate markets, in particular the voluntary carbon market. 

Global environmental product markets have experienced unprecedented levels of interest from both investors and corporates. Investment has flowed into companies active in these markets and into the underlying certificate markets, such as the established cap-and-trade systems in the European Union (EU) and California and various energy attribute certificate schemes.

Concerns Remain about Achieving Emissions Reductions

Although the investor gold rush and expected trading revenue growth are likely to provide financial returns for investors, a fundamental issue remains: whether these markets are good for the planet and will deliver emissions reductions. Many questions have been raised about the use of certificates, with carbon offsets often attracting the most criticism. Some of the issues are historical and linked to the Kyoto Protocol, which did not impose emissions limits on many countries. These concerns have been resolved in principle with the move to the Paris Agreement. Other concerns were linked to the rules and controls on certificate quality, where work on ensuring environmental integrity has continued. Certificate markets and market-based policy measures play a crucial role in supporting the transition to a low carbon economy and have already demonstrated how they contribute to addressing climate change.

Certificate Markets Offer Benefits

Certificates support the development of robust measurement and verification approaches. Where carbon pricing mechanisms are in operation, the level of accuracy in measuring emissions has increased and better estimates of industrial GHG emissions are available.

Certificates provide information on the environmental impact of a product, energy carrier, or service, and thus support redirecting consumer choice toward lower carbon alternatives. This role is the main role of energy attribute certificates, but various existing and emerging sustainability labeling initiatives for green products are also evidence of certificates as informative.

In addition, certificates support efficiency by helping discover the lowest cost options to decarbonize by imposing a cost (or providing a benefit) without necessarily defining how to achieve the relevant objective. Considering carbon offsets, for example, financing was initially directed toward the cheapest abatement options such as industrial gas emissions reduction projects, which have also been a source of criticism. Similarly, the recent prominence of nature-based solutions in carbon offset market discussions is also due to the lower costs of these emissions reductions compared with implementing technological change in industry.

Certificate Markets Support Corporate Goals

Certificate markets can also support the development of new technologies because they provide additional income to renewable energy or emissions reduction projects. Such is especially the case when projects are additional and would not have been financially attractive without the consideration of certificate prices as project income. 

Finally, certificate trading as part of the policy mix supports target achievement. A recent study analyzing the impact of the EU Emissions Trading System argues that even relatively low certificate prices can lead to intended policy results. 

Designing certificate markets is a complex task, and market rules can change frequently due to the need to continually improve effectiveness as lessons are learned. However, the benefits that certificate markets bring, including ultimately supporting sustainability target achievement, suggests that they will continue to grow and expand their coverage globally.