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Growing up on the southern edge of the Brazilian rainforest, Jose Pinheiro Borges learned to watch out for loggers eyeing the trees around his village. Now he’s paid to keep his little patch of forest in tact. That scenario, if repeated across the Amazon, can help cool the planet by preserving one of the largest natural engines for sucking up carbon dioxide molecules.

Borges’s family is among about three dozen in the Rio Preto-Jacunda reserve who joined a carbon credit program almost a decade ago. The indigenous villagers are paid for every ton of carbon dioxide saved by successfully deterring illegal loggers and preserving about 100,000 hectares of rainforest. A kind of carbon broker, São Paulo-based Biofilica, sells the resulting credits in exchange for a transaction fee.

“It’s a way to protect the population here,” says Borges, 48, who also harvests nuts, acai and cassava for a living. “Our extractive activities are sustainable.”

Small farmers are the starting point for the complicated worldwide trade in carbon offsets, the valuable credits produced by planting trees, preserving natural carbon sinks or otherwise removing greenhouse gas from the atmosphere. Demand is booming — more credits changed hands in the first eight months of this year than in all of 2020, according to clean-energy researchers at BloombergNEF — as corporations and governments spend billions of dollars to meet their targets for zeroing out emissions.

Offsets are a convenience that allows buyers to continue polluting while essentially paying someone else to adopt climate-friendly behaviors. The sprawling and so far loosely organized market has come to encompass a wide range of activities, from funding renewable energy to stopping leaks at landfills, bound up in ad hoc deals with emitters.

But no global oversight or common standards exist, and an abundance of low-quality offsets appears to have little impact on climate change. If a polluter buys a credit derived from an ineffective project, the world ends up with more carbon in the atmosphere.

Today’s free-for-all market has emerged in part from the repeated failure of governments to agree on rules for a United Nations-organized trade of carbon offsets among countries. Negotiators at the COP26 summit in Glasgow, Scotland, will make yet another attempt at finalizing rules. The trade of carbon offsets between nations is covered in Article 6 of the Paris Agreement and remains the only unresolved part.

Smoke rises over farm land and protected areas near Sao Jose do Rio Pardo, Brazil, in August. | BLOOMBERG
Smoke rises over farm land and protected areas near Sao Jose do Rio Pardo, Brazil, in August. | BLOOMBERG

The idea is simple, in theory. An organized trade in carbon offsets would allow countries to share the burden of lowering emissions. If one country has exceeded its emissions goals, it can sell the excess to another. The intractable issue so far has been over how to design a market that avoids counting credits twice.

Under Article 6, a farmer like Borges in the Amazon rainforest would have multiple options for selling carbon credits. The first is through bilateral deals between countries, such as a pact now being drawn up by Switzerland and Peru in which carbon credits are swapped for green development funding. The second option would create a regulated carbon market governed by the U.N. to facilitate trades between countries that don’t have bilateral deals. A third might come from private-sector buyers. Hundreds of corporate polluters and sustainability experts, led by finance veterans Mark Carney and Bill Winters, are attempting to iron out the rules for such private trades in a separate process.

This raises the question that’s stymied negotiations for years: If a farmer like Borges puts carbon credits up for sale through one of these pathways, can the Brazilian government also claim credit for the same removed? “Article 6 can definitely undermine the entirety of the Paris Agreement if it’s set up badly and then used badly,’’ says Gilles Dufranse, policy officer at the nonprofit Carbon Market Watch.

Brazil has long opposed so-called corresponding adjustments, which would prohibit counting any emission cuts that are sold off against its national climate targets. Developed countries, led by the European Union, consider such double counting a grave risk and walked away from the negotiations over the issue at COP25 in 2019.

The debate is so complex that even some experts following it closely say they don’t fully understand all the arguments being put forward by countries. Negotiations have already begun on Article 6 ahead of the Glasgow summit, according to officials familiar with the talks.

This time around there’s hope for compromise. One idea is to allow a transition period during which credits generated wouldn’t be subjected to corresponding adjustment, says Henrick Hallgrim Eriksen, Norway’s minister of climate and environment. Norway and Singapore have been tasked with breaking the impasse.

Dufranse warns that such a bargain could undermine the Paris temperature goals. “It’s just cheating. It’s not really something that should be negotiated,” he says. “It’s like you set up the game and then say, ‘OK for the first five years — or the first 30 minutes of our game — nobody is going to respect the rules.’”

The incentive for governments to find a way forward is clear. Trade could halve the cost of meeting nations’ climate pledges if it works as planned, according to the World Bank Group. It’s also seen as a key way of channeling climate funds from richer countries to poorer ones to help address impacts of rising temperatures.

Big businesses are also eager for clarity at COP26. “It is really high time to have a system that allows for effective trading of emissions across borders,” says Andrew Wilson, global policy director at the International Chamber of Commerce, which represents thousands of businesses. While a set of U.N.-endorsed rules might make offsets more expensive and curtail supply, it will also boost credibility and help executives defend against accusations of greenwashing.

A strong rulebook for U.N.-backed government trades could pressure companies shopping for offsets in the private-sector market to uphold stricter standards, says Rick Saines at the consultancy Pollination Group. It could push up the quality of offsets and the prices paid to those doing the work of carbon removal in developing nations.

But Saines also sees risk that a stronger agreement could end up encouraging countries to lowball their national carbon targets. The outline of Article 6 stipulates that credits can only be sold by countries that exceed their carbon reduction goals. That might become an incentive to submit weaker national pledges that can be met early, thus opening up lucrative trade in carbon credits.

Back in the Amazon, Borges has worries about this year’s income. Brazil has seen a jump in wildfires and deforestation over the past two years, and his village is no exception. The first audit of his carbon credit program in 2015 delivered 1.2 million tons of credits, and proceeds from the sale brought in money for education, health care, and vocational training.

Since then, he says, squatters have burned 5,000 hectares and damaged forests that ring the reserve. That means a new audit will probably find his community generated less than half of the prior carbon credits. The families plan to deter more land grabs by spreading into isolated areas. Keeping trees alive is their only hope for harvesting more carbon credits in the future.

“Illegal deforestation will lead to fewer credits,” Borges says. “It is in our interest to maintain this forest and sustain our community.”

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