Credits issued under the landmark Paris accord come with limited oversight as international trading ramps up
4 min
When the South American nation of Guyana wanted to sell millions of carbon-offset credits to preserve its rainforests, government officials knew they had a problem: The country’s lush Amazonian forests were actually in good shape.
Guyana’s rate of deforestation was already low, meaning its forests wouldn’t yield much under standard methodologies for calculating carbon credits. So its government chose a new method that allows a large adjustment for countries with healthy forests. The change raised the credits that Guyana could issue sixfold. Guyana sold 37.5 million of them last year to U.S. oil giant Hess for at least $750 million, and is now shopping the remaining two thirds to countries facing pressure to comply with the landmark Paris climate accord, officials say.
That agreement calls for governments to adopt national plans to limit greenhouse-gas emissions and allows them to pay for emission-reduction projects elsewhere in the world to offset their own pollution. Credits for each ton of emissions cut can then be traded between countries. It is as if the emission reduction happened in the country buying the credit, not the one selling it.
Guyana is among the first in a long line of developing-world countries expected to cash in on credits compliant with United Nations agreements. Some officials worry the U.N. risks giving its seal of approval to credits for forests that aren’t under threat. At the COP28 climate summit under way in Dubai, negotiators are debating how much scrutiny carbon trading should face from U.N. experts and the public to prevent the mechanism from becoming a loophole in the Paris accord.
“If we play that game—every country gets to come in and pull an arbitrary methodology out of the ether, apply it to their forest areas and say give me credits—we’re never going to get anywhere,” said Kevin Conrad, the climate envoy of Papua New Guinea.
For now, the Paris accord imposes relatively little oversight on the market. Credits are required to undergo review by a panel of experts. But at last year’s COP in Egypt, governments decided that the experts wouldn’t be allowed to review the “appropriateness” or “adequacy” of projects.
That is fuelling fears the accord opens the door for polluting countries to buy lower-quality credits from poorer nations to meet their own emissions targets, undermining the Paris accord ambition of limiting global warming to 1.5 degrees Celsius above preindustrial era temperatures. Some developing countries are pushing for the right to keep much of the information around offset projects confidential. Companies would end up buying the credits, critics say, that would support spurious greenhouse-gas reduction claims. Hess said it would apply Guyana’s credits to its goal of completely offsetting its emissions by 2050.
“There is very little oversight of the process,” said Jonathan Crook of Carbon Market Watch, a Brussels-based nonprofit. “Some countries could set a higher bar, but there’s a risk that others do not.”
Guyana is in talks to sell credits to Singapore, which is evaluating whether it will accept the adjustment for low deforestation countries, an official involved in the talks said. The U.N.’s civil aviation agency last year said it would accept Guyana’s methodology under new regulations it set to limit emissions from international flights, making Guyana’s offsets the first eligible under the rules.
Switzerland is moving to purchase the first credits under the Paris accord, for non-forest projects in Ghana, Thailand and Vanuatu. The credits will then be used by Swiss companies to comply with the country’s greenhouse-gas limits under the Paris accord.
The Swiss government is refusing to invest in forestry projects because of uncertainties around the baseline against which the lack of deforestation is measured. Switzerland also has concerns around whether protections for forests are long term—a tree cut down or destroyed in the future would release the planet-warming carbon dioxide it has absorbed over its lifetime.
Corporations over the past decade have invested billions of dollars in greenhouse-gas offset projects in the developing world. Those projects yield so-called voluntary carbon credits: The companies are under no legal obligation to buy them but do so because of public commitments they have made to offset their carbon emissions.
Academic research and media reports have cast doubt on the impact of many of the projects underlying these credits. The problems were particularly acute in projects to prevent deforestation. Because such programs typically cover relatively small areas within a larger forest, they risk pushing logging and clear-cutting for agriculture into other sections that aren’t protected by a project.
Guyana’s project is designed to address some of these problems. It is one of the first to cover an entire nation, eliminating the possibility that deforestation could be displaced within the country. Covering around 45 million acres, it is one of the world’s largest forest-protection projects, according to Trove Research.
Guyana has some of the most pristine forests on the planet. They have been mostly spared the rampant logging and clear-cutting seen in neighbouring Brazil. Guyana lacks rich soil suitable for large-scale agriculture, a major driver of deforestation, scientists say.
“These are among the poorest soils on the planet,” said Janette Bulkan, a Guyanese forestry expert at the University of British Columbia.
Critics say issuing credits for protecting such forests violates a core principle of carbon crediting: They should only be issued for emissions that would have happened without the project.
Guyanese officials say its forests are nevertheless at risk in the near future without intervention. The country’s economy is growing quickly, as is global demand for the commodities that could be extracted from its rainforests. Guyana is also reaping a windfall from oil discoveries off its coast that are now being pumped by Exxon Mobil and Hess.
“Guyana’s forests offer opportunities for a wide range of goods and services, and development opportunities for opening up areas for industry and manufacturing,” said Pradeepa Bholanath, who oversees climate policy at Guyana’s Ministry of Natural Resources.
Guyana’s credits have been calculated by Architecture for REDD+ Transactions, a program run by the U.S. nonprofit Winrock International. The program’s methodology allows countries like Guyana that have had little deforestation in the past to issue credits against apredicted future level of deforestation under a formula devised by Winrock.
Winrock and other advocates of the methodology say the money allows much-needed climate finance to flow to rain-forested countries, even if they haven’t experienced past deforestation. Guyana has already received more than $100 million in its deal with Hess. Officials say that money is reaching tribes that live in the rainforests and being used nationally for forest preservation and renewable energy projects.
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4 min
U.S. investors’ enthusiasm over Japanese stocks at this time last year turned out to be misplaced, but the market is again on the list of potential ways to diversify. Corporate shake-ups, hints of inflation after years of declining prices, and a trade battle could work in its favor.
Japanese stocks started 2024 off strong, but an unexpected interest-rate increase in August by the Bank of Japan triggered a sharp decline that the market has spent the rest of the year clawing back. Weakness in the yen has cut into returns in dollar terms. The iShares MSCI Japan ETF , which isn’t hedged, barely returned 7% last year, compared with 30% for the WisdomTree Japan Hedged Equity Fund .
The market is relatively cheap, trading at 15 times forward earnings, about where it was a decade ago, and events on the horizon could give it a boost. Masakazu Takeda, who runs the Hennessy Japan fund, expects earnings growth of mid-single digits—2% after inflation and an additional 2% to 3% as companies return more to shareholders through dividends and buybacks.
“We can easily get 10% plus returns if there’s no exogenous risks,” Takeda told Barron’s in December.
The first couple months of the year could be volatile as investors assess potential spoilers, such as whether the new Trump administration limits its tariff battle to China or goes wider, which would hurt Japan’s export-dependent market. The size of the wage increases labor unions secure in spring negotiations is another risk.
But beyond the headlines, fund managers and strategists see potential positive factors. First, 2024 will likely turn out to have been a record year for corporate earnings because some companies have benefited from rising prices and increasing demand, as well as better capital allocation.
In a note to clients, BofA strategist Masashi Akutsu said the market may again focus on a shift in corporate behavior that has begun to take place in recent years. For years, corporate culture has been resistant to change but recent developments—a battle over Seven & i Holdings that pits the founding family and investors against a bid from Canada’s Alimentation Couche-Tard , and Honda and Nissan ’s merger are examples—have been a wake-up call for Japanese companies to pursue overhauls. He expects a pickup in share buybacks as companies begin to think about shareholder returns more.
A record number of companies have also delisted, often through management buyouts, in another indication that corporate behavior is changing in favor of shareholders.
“Japan is attracting a lot of activist interest in a lot of different guises, says Donald Farquharson, head of the Japanese equities team for Baillie Gifford. “While shareholder proposals are usually unsuccessful, they do start in motion a process behind the scenes about the capital structure.”
For years, money-losing businesses were left alone in large corporations, but the recent spate of activism and focus on shareholder returns has pushed companies to jettison such divisions or take measures to improve them.
That isn‘t to say it is going to be an easy year. A more protectionist world could be problematic for sentiment.
But Japan’s approach could become a model for others in this new world. “Japan has spent the last 30 to 40 years investing in business overseas, with the automotive industry, for example, manufacturing a lot of the cars in the geographies it sells in,” Farquharson said. “That’s true of a lot of what Japan is selling overseas.”
Trade volatility that hits Japanese stocks broadly could offer opportunities. Concerns about tariffs could drag down companies such as Tokio Marine Holdings, which gets half its earnings by selling insurance in the U.S., but wouldn’t be affected by duties. Similarly, Shin-Etsu Chemicals , a silicon wafer behemoth that sells critical materials, including to the chip industry, is another potential winner, Takeda says.
If other companies follow the lead of Japanese exporters and set up shop in the markets they sell in, Japanese automation makers like Nidec and Keyence might benefit as a way to control costs in countries where wages are higher, Farquharson says.
And as Japanese workers get real wage growth and settle into living in an economy no longer in a deflationary rut, companies focused on domestic consumers such as Rakuten Group should benefit. The internet company offers retail and travel, both of which should benefit, but also is home to an online banking and investment platform.
Rakuten’s enterprise value—its market capitalization plus debt—is still less than its annual sales, in part because the company had been investing heavily in its mobile network. But that division is about to hit break even, Farquharson says.
A stock that stands to benefit from consumer spending and the waves or tourists the weak yen is attracting is Orix , a conglomerate whose businesses include an international airport serving Osaka. The company’s aircraft-leasing business also benefits from the production snags and supply-chain disruptions at Airbus and Boeing , Takeda says.
An added benefit: Its financial businesses stand to get a boost as the Bank of Japan slowly normalizes interest rates. The stock trades at about nine times earnings and about par for book value, while paying a 4% dividend yield.
Corrections & Amplifications: The past year is expected to turn out to have been a record one for corporate earnings in Japan. An earlier version of this article incorrectly gave the time frame as the 12 months through March. Separately, Masashi Akutsu is a strategist at BofA. An earlier version incorrectly identified his employer as UBS.
