Framing Is Everything

What are we collectively trying to accomplish through the production and sale of carbon credits? Most people would say "address climate change," which is really shorthand for "finance the production of carbon credits at a scale large enough to mitigate climate change."

Yet almost thirty years after Kyoto created the first international carbon market, transaction volumes have never reached the scale required to accomplish that goal. This is not for lack of effort. The problem is framing.

To frame an idea is to choose the words and stories that communicate its essential nature, and the frame, once chosen, dictates how the idea is received by others. A carbon credit is just an idea: an intangible representation of human activity. It is interpreted, and valued, entirely by the rules of the frame it is presented in.

Carbon has historically been presented in one frame: as a tool to offset emissions. This is a consumption frame, and within it, value is created by the act of consumption. The credit is purchased in order to be consumed; the buyer retires it to eliminate an environmental liability, and that act realizes 100% of the credit’s value. The frame is valid, but when value exists for only an instant, the transaction can only be an expense, generating no economic return for anyone but the retiring user.

A consumption frame cannot move investment capital.

Luckily, capital markets have developed another frame to mobilize capital at scale: the investment frame, built around the productive enterprise.

A carbon project is a productive enterprise: land, engineering, and verification combining to produce an output of value, the carbon credit. And in the investment frame, value is not created at retirement. It is present from the day the credit is produced, because the output of a productive enterprise encapsulates both the effort to create it and its future value at retirement. Value that exists across time can be invested in.

Inside this frame, the credit is a store of value, a hedge against financial exposure to physical climate and transition risk, and an environmental benefit, all at the same time.

The notion that we must choose between frames is a false dichotomy. These two frames do not disagree about whether carbon credits are ultimately consumed; both end in retirement. They differ about when their value is recognized, and who may hold and transfer that value in the meantime. Different frames do different jobs.

Carbon needs to adopt a frame that existing markets can parse, because finance at the scale climate change requires can be mobilized in only one way: through a functioning, liquid capital market in carbon recognized as an investable asset.

This series, No New Parts, describes how we can accomplish just that without inventing anything new.

Next up: The Commodity Dead End.