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Carbon trading from Kyoto to Paris and beyond

ecosecurities has won three project development categories in Environmental Finance's Voluntary Carbon Markets rankings 2023. Our CEO, Pablo Fernandez reflects on a quarter century of carbon project development.


Environmental Finance: ecosecurities first made its name in the carbon markets created by the Kyoto Protocol, particularly the Clean Development Mechanism (CDM). How has your business evolved since Kyoto was superseded by the Paris Agreement?


Pablo Fernandez: The company was created even before Kyoto – in January 1997. At that time, without any regulatory framework, our focus was on the voluntary market. With the creation of the CDM, we thrived in that regulated market. Given our background, we are very comfortable in the voluntary market and, indeed, we played a pivotal role in shaping it, contributing to the establishment of the Verified Carbon Standard in the 2000s. Nowadays, we have been very active on the negotiations and discussions related to the Article 6 regulatory framework, processes and methodologies. We are well prepared and positioned for this new era of carbon markets.


We have essentially been doing the same thing for the last 25 years – connecting finance to the development of impactful and sustainable projects, using carbon pricing to deliver climate mitigation. While our profit-for-purpose mission is constant and guides our actions, our activities and execution plan will necessarily evolve as the market changes.


EF: As far as project-based emissions markets are concerned, what are the similarities and differences between Kyoto and Paris?


PF: The Kyoto Protocol took a top-down approach. Offsets generated by the CDM were the focus of international transactions; there was essentially a single instrument. That top-down approach ran into deadlock in Copenhagen [in 2009]. So, the Paris Agreement took a revolutionary, bottom-up approach, allowing different countries to move at different speeds, and develop approaches to climate mitigation in their own way.


The price we paid for that is that now we have a whole patchwork of approaches to carbon pricing: the World Bank report finds 100 carbon pricing initiatives being developed around the world, with minimal levels of connection. We have offsets, insets, local carbon markets, the EU's Carbon Border Adjustment Mechanism: it's a much more complex landscape, and definitely more difficult for newcomers to navigate.


Another difference worth stressing is that the CDM was very much operating at the margins, with projects here and there. Now, we are operating at a much greater scale, and really at the core of the economy. Twenty years ago, there might have been one REDD+ [reducing emissions from deforestation and forest degradation] project in the whole of Latin America – now we have hundreds of projects in a single country.


Our global presence helps us, our partners and clients to navigate such a complex landscape. Moreover, we are today working closely with governments in Latin America, Africa, and Asia to develop not only individual projects, as we did during the Kyoto Protocol, but transformative programmes that can help developing countries decouple their economic growth and development from a growing emissions profile.


EF: Some analysts see the voluntary carbon market as at an inflection point. Do you agree, and what conditions need to be in place for the market to meet its potential?


PF: Whilst we embrace the objective criticism of the imperfections of the market, and aim to better ourselves every day, to those naysayers who criticise for its own sake, I ask, "Show me a perfect market, a perfect system. And what have you done today about the climate emergency?" We believe acting and doing is better than doing nothing at all.

That said, the voluntary carbon market has grown rapidly in the vacuum created by the lack of international regulatory frameworks on the demand side. With more stress on the financial system, higher interest rates, war in Ukraine, etc., the fragility of that demand has been exposed.


Over recent years, the regulatory framework that has evolved around the voluntary market has very much focused on the supply side, believing that demand would grow naturally, and the priority should be to ensure high-quality supply. The Integrity Council for the Voluntary Carbon Market (ICVCM) and the Voluntary Carbon Markets Integrity Initiative (VCMI) have been doing good work in this regard, but now more work is needed on the demand side.


What buying companies want is a framework that allows them to make investments in climate mitigation and not risk facing criticism for these investments. We need standards that corporations know that they will be evaluated against. We hear all the time from companies that decide that, rather than spend lots of money and get criticised, they would rather do nothing and wait and see.


We have a climate emergency – we can't afford to wait. At ecosecurities, we are doing our small part in contributing to these efforts to help mature the market, but a lot more work is needed by all involved.


EF: Meanwhile, concerns around environmental integrity continue to dog the market. How are those best addressed?


PF: Integrity has many aspects. A big part of the challenge is that it's impossible to agree on a single definition of integrity that is applicable to different technologies and project types. Take a project that captures N20 from an industrial plant. It has integrity when it comes to carbon monitoring and accounting and, in many countries, additionality. But such a project has absolutely no sustainability co-benefits, so it's of no interest to voluntary carbon buyers.


At the other extreme, REDD, water filter and clean cookstove projects provide massive sustainability benefits – improving health, benefiting local communities, protecting biodiversity. However, each cookstove only reduces a few tonnes of carbon dioxide a year, so standard-setters made a lot of assumptions to create a simplified carbon methodology for those projects. That means there is a trade-off between the carbon calculations and the transaction costs involved.


There's no silver bullet to this. There are bodies like the ICVCM doing a good job of assessing the methodologies that the market is using. But the bottom line is that there is no 'one size fits all' approach to integrity. Our view is that when you want to bring together climate integrity, biodiversity integrity and community integrity, there are no shortcuts and no room to cut corners.


EF: What's next on the agenda for ecosecurities?


PF: There have been a lot of newcomers in the space over the last few years, claiming that carbon projects are easy to develop. They are not. It takes a lot of effort, and experience is crucial. One of the reasons we have been around for 25 years is that we have built our reputation on doing what's right and fair – building our projects with the highest level of integrity. This isn't necessarily the easiest way to do it, but it's how we plan on being around for another 25 years.


We are a project developer at heart. We connect projects on the ground with the financial markets. We have recently focused on nature-based solutions, but with further developments around Articles 6.2 and 6.4 [of the Paris Agreement, which will allow for international carbon trading], we are also looking at 'technology-based solutions' for hard-to-abate emission sources and the energy sector in general. We are very keen to help bring Article 6 into life and get closer again to a single international carbon market, with a single price signal. That would be the ideal world.


In the meantime, we are working with governments, large corporations, small companies, and farmers (large and small) worldwide to democratise climate finance and enable as wide a range of participants to come into the carbon market, to help them move forward on their decarbonisation journey. We have seen over the course of our history that our business model is resilient, and protecting our reputation means we don't take shortcuts. In spite of the critics and challenges, our commitment to sustainability and innovation in the carbon markets continues to drive us forward.


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