IN previous columns, I provided what I hope was a reasonably easy to understand sketch of the most basic form of a carbon market, the so-called cap-and-trade market. I am not going to take up space to repeat all that, but for those who may have missed it entirely, what this form of a carbon market essentially does is to incentivize reductions in greenhouse gas emissions — because, after all, that is the real point of all this — by quantifying emissions and assigning a monetary value to them. If an emissions producer exceeds a certain amount (measured in metric tons of carbon dioxide or CO2-equivalent), it pays a tax on the extra; conversely, if it is able to reduce its emissions below the quota, the surplus "carbon credits" can be sold.
Part of what makes the concept of carbon markets a bit complicated, and frankly a bit risky, is the fact that it commoditizes the absence of something. A ton of CO2e has value in the form of tax, if the government has implemented a carbon tax, but a carbon credit's value is based on that ton of CO2e not existing. That leads to some interesting market creations, things that the Philippines may find financial opportunities in, or that may make a complete mess of any attempt to develop and operate a carbon market here.
First, carbon credits can be created by entrepreneurs by creating new processes or equipment that reduces emissions from an existing source. A company that I have become acquainted with over the past couple of months — and about which I will probably have more to say, once they establish themselves here in the Philippines — is one good example. It has developed an eco-friendly cooking stove to replace the dirtier versions used by people in less-developed areas, where they burn wood, cow dung, coal, peat or some form of gas. By diligently monitoring the use of the replacement stove, the company can then calculate the amount of carbon emissions that have been saved; once that data is verified by one of the several carbon registry agencies that have come into existence in the past couple of years, the company now has carbon credits it can trade.
The same "create something out of nothing" principle can be applied to an almost limitless number of ideas. A company that replaces its diesel-powered delivery trucks with electric versions, or even ones equipped with newer, cleaner diesel engines could, if it is willing to do the paperwork, also register its CO2e emissions savings as carbon credits. The process would be a bit more complicated for Philippine businesses as there is no certifying entity here, but it is by no means insurmountable, even if the government were to never formulate any carbon laws and regulations.
The government may be more encouraged to do that after a recent development elsewhere in the world, one that will eventually create a supply of carbon credits in a different way. In November 2022, Brazil, Indonesia and the Democratic Republic of Congo signed a pact dubbed the "Rainforest Protection Agreement" to create a "funding mechanism" to help preserve rainforests.
These three countries have more than half of the world's rainforests within their borders, and rainforests are universally acknowledged as the world's most important natural filter for CO2 emissions. Although the details of how the proposed funding mechanism might work are necessarily vague, it would entail commoditizing the CO2 removal capacity of each country's rainforests, in effect instantly creating a substantial, tradeable natural resource that, in market terms at least, is potentially as valuable as coal, oil or mineral ores.
This is a ghostly sort of gold rush the Philippines could take advantage of, although the country has severely handicapped itself by decades of regarding the Department of Environment and Natural Resources as a way to institutionalize national hatred of forests. Undoing that damage will take decades more, but the effort might be worthwhile given the potential value this amazingly fertile land could generate.
There is also another aspect to the concept that may have some appeal to policymakers here. In a commentary last month, the Hinrich Foundation speculated that the existence of large carbon sinks in the form of forests could lead to a substantial increase in economic power for the "Global South." Countries with rainforests could actually form a cartel to manage the global carbon market and dictate prices, in much the same way OPEC does with oil; as a matter of fact, the OPEC countries, all of which are prodigious producers of greenhouse gas emissions, would actually be at the mercy of the "carbon cartel" under such a scenario.
Of course, all of this is rather far-fetched at this point, and in a recent conversation, my go-to expert on commodities provided a somewhat discouraging, but quite necessary reminder of how tenuous the broad concept of carbon markets really is. Contrived commodities such as carbon credits — those annoying cryptocurrencies are probably also a good example — only have value if everyone agrees they have value, because they have no intrinsic value as other commodities do.
You can't eat carbon credits; you can't build or manufacture anything with carbon credits; and you can't live in or on them. Any market that depends on a shared assumption — or faith, if you like — has a certain potential for instability that can never be eliminated. It can be controlled, but that requires a high degree of competence and continuous effort, and even then the risk of harmful volatility will never quite go away.
That does not mean that the Philippines should not try to establish its own carbon market here; I for one firmly believe that it not only should, it has no choice. But it will require a great deal of work, certainly more than is represented by some flippant, two-page bill in Congress, or the minutes of three meetings of some ad-hoc executive branch task force.