Nonprofit Seeks to Trap Carbon in the Financial Markets – The Wall Street Journal

Scientists have been trying to stash carbon emissions in rocks, soil and trees to slow the effects of climate change. Now an economics professor wants to trap carbon dioxide in the financial markets.

Prof. Michael Greenstone’s plan takes advantage of the current cap-and-trade system around carbon emissions. It creates a secondary marketplace that allows organizations to offset their carbon emissions with pollution permits. The hope is that this would effectively reduce emissions and redirect capital to environmentally focused startups.

‘We have seen time and time again that markets can be such powerful forces for solving social problems.’

— Prof. Michael Greenstone

The plan is being driven by the nonprofit Climate Vault that Dr. Greenstone launched with Don Wilson, chief executive of Chicago financial firm DRW Holdings LLC, Bala Srinivasan, senior adviser to the president at the University of Chicago, and Andrew Dailey, managing director of MGI Research LLC. Dr. Greenstone is a professor at the University of Chicago and former White House chief economist during the Obama administration.

The nonprofit launches as investors and companies pour billions of dollars into sustainability-focused financial products, turning the promise of doing good into potential profit centers for Wall Street firms. It is so far unclear if the suddenly booming business of selling environmental investing will continue or if these new products will make an environmental impact.

“We have seen time and time again that markets can be such powerful forces for solving social problems,” said Dr. Greenstone.

Currently, several U.S. states and Canadian provinces determine caps for the amount of emissions that certain industrial sectors can emit each year within their regions. These companies need to buy slices of the limited pollution pie in their region through a cap-and-trade market, a type of exchange for pollution allowances.

Under Climate Vault’s plan, organizations pay for permits to offset emissions not covered by the market.

Climate Vault promises to “vault” the permits, meaning it won’t trade them, theoretically keeping carbon dioxide from being emitted and increasing the value of the remaining permits. The cash that organizations pay for carbon permits would then be used to fund companies that are developing technologies to remove carbon from the atmosphere.

To be sure, confidence in Climate Vault’s model is dependent on confidence that the carbon markets themselves work as intended in reducing carbon emissions.

A critic of Carbon Vault’s model pointed to weaknesses in carbon markets, which he said often have far more permits available than are necessary. This would keep prices low and reduce the incentive for businesses to cut their emissions.

California, for example, has a glut of unused allowances, according to Danny Cullenward, a climate researcher and policy director of CarbonPlan, a nonprofit focused on the scientific integrity of climate projects.

“These emissions budgets are politically determined, which means that large-scale interventions from the private sector don’t necessarily influence outcomes,” he said.

Dr. Michael Greenstone’s plan allows organizations to offset their carbon emissions with pollution permits. He is shown in his office, photographed through Zoom.

Photo: Justin J. Wee for The Wall Street Journal

A spokesman for the California Air Resources Board that runs the state’s cap-and-trade program said the organization hasn’t seen any evidence of oversupply.

“There are mechanisms to control supply if there are changes in demand (high or low),” he wrote in an email.

So far, Climate Vault has bought about 200,000 metric tons of carbon allowances on behalf of its donors, the emissions equivalent of what 40,000 passenger vehicles produce in a year, according to the Environmental Protection Agency.

This spring, Vanderbilt University donated roughly $1.6 million to Climate Vault to offset the school’s carbon footprint for 2021. Climate Vault bought the amount of carbon dioxide permits needed to offset Vanderbilt’s expected pollution this year and vaulted them away.

Large Wall Street firms have also bought into the plan.

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“We were intrigued by the idea of purchasing and retiring credits from the regulated market and eventually using those to potentially fund carbon-capture technologies,” said Maryanne Hancock, CEO of Y Analytics, a division of private-equity firm TPG that oversees environmental, sustainability and governance strategy, among other areas.

“It gives you deeper assurance the carbon is actually being averted,” she said. TPG was an early donor to Climate Vault.

Climate Vault also plans to work with companies that are using technology or natural processes to remove carbon from the atmosphere. This so-called carbon capture is a potential tool in the effort to reduce carbon emissions enough to limit climate change.

If the carbon-removal companies succeed in removing carbon dioxide, Climate Vault will pay them with the carbon permits it has vaulted away. The companies can then sell those permits on the carbon market for cash.

Former Energy Secretary Ernest Moniz serves as the chairman of Climate Vault’s effort to fund companies doing carbon capture. Technological approaches such as pulling carbon directly from the air so far haven’t worked at scale.

“There’s a whole bunch of other directions that really need attention and can be significantly less expensive than direct air capture,” said Dr. Moniz.

Write to Jenna Telesca at jenna.telesca@wsj.com

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Nonprofit Seeks to Trap Carbon in the Financial Markets – The Wall Street Journal

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