In last week’s column about the PRI in Person, the Snap touched on the contrast between the American tendency to make hyperbolic statements against more modest and conservative approach by their Scandinavian counterparts, and how this translates into a need for disclaimers and other safeguards. The need for sustainability regulation is one of these guardrails that the finance industry always tries to downplay. And yet, the very nature of sustainability claims, the fact that they could limit one’s own ability to maximise financial profits, puts the industry at risk when regulations aren’t there to boost trust.
Hyperbole and Culture
Hyperbole serves a purpose. If the obstacles faced are greater, so is the credit for overcoming them. Hyperbole, within reason, makes for good storytelling, and good stories make for a better sales pitch. But even on an anecdotal level, I have witnessed that this is a practice with limited value in the Nordics. While recounting some misadventure I comedically overcame, I have often encountered scepticism about the embellishments I made here, whereas in the south of Europe they would have been received as entertaining. Culture works that way.
Remember Max Weber? He came up with the concept of a “protestant work ethic”, according to which Lutheran and Calvinist cultures tend to be more hardworking than their Catholic counterparts. Potentially outdated stereotypes aside, an alternative view might suggest that peoples from harsher environments, if they can learn to overcome their inherent hardship, become better at delayed gratification and more cohesive in order to overcome the challenges that nature throws at them. Following either explanations, it shouldn’t surprise us that both Americans and Scandinavians have reasons to be proud of their capitalistic successes. Somewhere along the line, however, the expression of this prosperity has gone in two diametrically opposed directions for both people: one boisterously up the self-promotion path, the other down Jantelagen.
Trust and Regulation
In the real world, hyperbole is not without its costs. Professionally speaking, disclaimers and other careful legal language becomes necessary to compensate for potentially misleading statements. The solution to what economists call the principal-agent problem is a mechanism for monitoring and, if necessary, correcting those behaviours. This policing takes time and resources but inevitable when relying solely on trust is no longer an option.
Based on the empirical analysis of the effect of these issues in a cross section of countries, Zak and Knack 2001, writing in the Economic Journal of the Royal Economic Society, show that “trust is higher in more ethnically, socially and economically homogeneous societies and where legal and social mechanisms for constraining opportunism are better developed. High-trust societies, in turn, exhibit higher rates of investment and growth.” The authors of that study quote 19th century economic liberal utilitarian philosopher, John Stuart Mill, as having observed that “there are countries in Europe (…) where the most serious impediment to conducting business concerns on a large scale, is the rarity of person who are supposed fit to be trusted with the receipt and expenditure of large sums of money.”
In a sense, pubic trust, if and when it is deserved, is better for everyone. A well-known example of this dynamic can be seen in the fact that historically (the trend does seem to be reverting towards the global mean) the acceptance of higher taxes among Nordic people is due to their trust in government. When markets or political blocks increase in size, however, trust decreases and external mechanisms are required to enforce compliance with the rules. On a continental level, deviations and norm violations cannot be as closely monitored as in a village where everyone knows each other. This is why the European Union is often accused of over-regulating markets, for example, and why some people are so keen on bringing democracy to its most local communitarian level of accountability.
Distrust in Carbon Credits Markets
All of this might seem trivial and slightly academic, but it is not. The cost of mistrust is not an abstract problem. It is something that affects us every day and something at the heard of sustainability. The example of carbon credits markets offers a case in point.
Fundamentally, a good idea – adjusting the market for carbon capture by financially compensating technological and nature-based approach to storing CO2 emissions – this corner of the sustainability world has become plagued by scandals, distrust and embarrassment. Just this week, the “Follow the Money” journalistic project highlighted the case of Kenneth Newcombe, a carbon-offsetting pioneer, founder of C-Quest Capital, member of the Board of Directors of carbon credits certifier Verra and former head of the World Bank’s Carbon Finance Unit. According to the report, Newcombe profited from the development of a model of CO2 accounting that reportedly overstated carbon capture outcomes, a revelation that caused the market to crash by more than 60 per cent in 2023 and himself to be indicted in the USA.
The Need for More Carbon Capture Regulation
The problem is natural. As is the case with most activities related to sustainability, they are relatively young and unregulated. Exaggeration and misrepresentation are to be expected. In today’s global society and faced with an issue that affects the entire planet, there can’t be any other conclusion that the need for regulation. Carbon credits can’t work at the scale of a village and thus trust alone won’t do.
The European Union, for example, is in the process of implementing the EU Carbon Removals and Carbon Farming (CRCF) Certification Regulation. This will be supported by the Green Claims Directive, “which aims to address greenwashing and help consumers make truly greener decisions when buying a product or using a service,” by setting rules for the types of green claims that can be made.
The Green Claims Directive is making its way through the legislative process. Last week, the European Parliament (which represent European citizens) announced it has entered the negotiations part of the legislative process where it and the Council (which represents national governments) find a common position on the issue, a crucial step before the directive’s final approval.
Looking over the horizon, the future looks like it will involve more regulation. This is unfortunate but necessary. No one likes red-tape. But personal experience, economic theory and history all point to the fact that trust alone won’t allow progress at a global scale.
