As new developments in renewable energy make the technology more accessible, the world is beginning to shift away from dependence on fossil fuels. Much of the international community is aiming for a net-zero carbon emission energy sector. Some countries, however, need economic assistance to meet the financial demands of such a transition. Rachel Kyte, Dean at The Fletcher School at Tufts University, joined us on this episode of the Siemens Energy Podcast to explain ways these economic demands are being met through systems such as the Voluntary Carbon Market.

Global warming and climate change can be directly linked to the rise of industrialization. In the 18th and 19th centuries, as technology advanced, so too did carbon emissions. It’s these emissions that have contributed to a sharp increase in global temperature over the last 200 years. Because of such a clear understanding of climate change’s root cause, it’s easy to see that the countries that benefited most from the Industrial Revolution have also contributed the most to the current state of the environment.

After the 2021 United Nations Climate Action Conference, Rachel Kyte sees an obvious responsibility from these nations to lead the charge in slowing global warming. This responsibility is the result of both culpability for climate change, and financial wealth brought about by industrialization. The former is a historical and moral claim while the latter is a practical one.

It’s not hard to understand why many see the need for historical contributors to climate change to become contributors to its prevention as well. Those with the largest carbon emissions carry the largest responsibility to cut emissions. However, those emissions-heavy nations also have the most opportunity to cut emissions, both for themselves and for smaller countries.

The most industrialized nations in the world are also the most productive, and for all the environmental harm that industrialization has done, it has created thriving, robust economies. In the transition away from fossil fuels and towards renewable energy, this is important—the infrastructure needed to create energy systems built around renewable resources is expensive. While wealthy nations have the resources to implement strategies that reduce dependence on fossil fuels, many poorer nations don’t. In fact, there’s an immense opportunity to strengthen these smaller economies were they to tap into local fossil fuel resources. Moving towards zero-carbon emissions and renewable energy sources not only carries the cost of building new infrastructure, but also the cost of forgoing potential fossil-fuel profits that other, wealthier nations have enjoyed for centuries.

Per the Paris agreement, the industrialized nations of the world have pledged $100 billion in financial assistance to poorer nations needing to build a renewable energy-based economy. While the actual cost of the necessary infrastructure far exceeds this number, the pledge serves as a symbolic acknowledgment of the responsibility to aid in the energy transition.

A significant vessel of this flow of financial resources has been the Voluntary Carbon Market (VCM).

Because industrialization leads to both wealth and carbon emissions, it’s generally true that poorer, more rural nations have fewer carbon emissions than wealthier, more urban and industrialized nations. In some cases, a nation’s natural resources, like forests or other abundant plant life, might even offset more carbon emissions than they’re producing. In this case, they would have a negative carbon footprint, and that negative footprint would earn them a carbon credit.

A more industrialized nation, on the other hand, might have a significant carbon footprint that exceeds their current ability to overcome in their journey towards net-zero emissions. In order to keep pace with the concessions settled by the Paris Climate Agreement, they might then purchase a carbon credit from another nation. This credit would count towards reducing emissions by a given amount, helping larger nations reach their emissions-reduction goals.

This, in turn, injects capital into nations seeking to build out energy infrastructure according to their carbon-neutral goals. In this system, the global emissions targets are able to be met, and capital is allowed to flow into systems with greater financial needs.

While an optimist may see the VCM as a simple solution to a complex problem, Rachel Kyte offers a dose of realistic caution.

As with any financial system, the possibility exists for the misuse of funds. The VCM is still a market, and market functions are often dictated largely by self-interest. The middlemen handling the flow of funds, who are motivated neither by green infrastructure nor carbon reduction, often have profit as their chief interest. That self-interest may well compete with the ultimate purpose of the market itself, which is to reduce the global carbon footprint, and slow the progress towards that purpose.

Companies receiving funds or buying carbon credits may also make claims about their emissions that can’t or won’t be verified. This could lead to a future where carbon reduction stalls, or even backslides, while the capital that incentivized that reduction is misused.

These hurdles could be overcome with tighter regulation governing the VCM. As it stands, this market is relatively new and unregulated. As the market develops, the United Nations is expected to propose new initiatives to govern the rules by which the market functions. These standards could include processes by which certain carbon-reduction claims are verified, or how capital implementation is monitored and approved. Such regulation could go a long way toward ensuring the integrity of the market into its long-term future.

As the VCM takes shape, Rachel Kyte offers a word of caution regarding the renewable energy transition. For nations with limited energy infrastructure of any kind, especially those with a negative carbon footprint, it may be tempting to lean more into fossil fuels as a tool to meet current energy demands until the renewable infrastructure is in place. This, she says, is antithetical to the global effort.

What may seem like a healthy short-term gain can have long-term consequences. In the movement to stall climate change, a long-term vision is what’s necessary to be successful, and short-term benefits are in fact the worst culprits of global warming. To reach the required carbon reduction goals, nations entrenched in fossil fuels must begin to slowly move towards renewable energy—and nations not already dependent on fossil fuels must not allow themselves to dip into that well.

With time, effort, and the required capital, there is an opportunity for regulated systems, such as the Voluntary Carbon Market, to speed the implementation of renewable energy and create a net-zero global carbon footprint.