It’s time to bring back the Montreal Protocol principles

The opinions expressed here by Trellis expert contributors are their own, not those of Trellis.

The last few years have been a wild ride for the carbon markets. Well implemented, they could be an incredible tool for rewarding the changes that will help us survive on this planet for the long haul.  

In their current state, though, it’s been a bit of a murky path, with many starts and stops. It’s clear we haven’t hit our stride and given all the effort to make these markets work, it’s worth asking why.

To explore this, let’s look at the last time we prevented a global climate disaster. The Montreal Protocol was passed in 1987 after we realized that our widespread use of chlorofluorocarbons (CFCs) was tearing a hole in the ozone layer.  

Given that we avoided this disaster, it’s surprising how rarely discussed the actual magnitude of the danger was. Until the ozone layer formed roughly 600 million years ago, there was no complex life on land. No plants, no animals, no fungi. Just a few hardy microbes typically hiding in formations that protected them from the aggressively ionizing ultraviolet radiation. The world without the ozone layer would have regressed the atmosphere back to a condition that would prevent any of our crops from growing, and any humans that survived would need to stay permanently indoors, or only venture outside with full body coverage.

In other words, the Montreal Protocol was a full-on save the world moment, and one where we stepped up to the challenge, phasing out most CFC use within a decade.  

How did we pull this off in such a short span, and what lessons does it offer for how we approach CO2e? Let’s walk through some of the major features of the agreement to highlight what made it so effective.

A phased approach

First off, the agreement was not an all-out ban on CFCs when it was passed in 1987. It actually allowed the total amount of CFCs to grow to 150 percent  by 1991, which was designated as the peak, before moving rapidly to 25 percent of 1987 levels by 1994, and 0 percent of 1987 levels by 1996. 

The phases created less friction for the many folks that needed to undergo capital expenditure  upgrades because  if you had recently bought equipment, the nine-year span gave you a chance to get most of the useful life out of your equipment. If you were closer to the end of your equipment life, it made sense to upgrade sooner. This gave industry some flexibility to plan their upgrade timing and do so in a way that made sense for their operation.  

What we can learn from this is that any change that drives large and immediate financial loss or requires a huge capex upgrade burden will understandably generate more pushback from industry, while an approach that’s phased over the course of standard equipment life gives businesses time to plan, thus minimizing operating disruption.

Another major feature of the Montreal Protocol is that it recognized that high-resourced nations have more capital to support capex upgrades than lower-resourced nations. It was also the case that these higher-resourced nations were generating a disproportionate amount of CFC (75 to 80 percent) while lower-resourced nations contributed the balance.  

This same pattern exists today with carbon emissions. For example, the continent of Africa represents 18 percent of the global population, but only 1.7 percent of global carbon emissions. The Montreal Protocol handled this elegantly by giving a longer timeline (roughly an additional decade) for developing nations to complete their phaseout. This still kept the ceiling on CFCs low while making space for a just transition that respected the differing resource levels nations had to respond.

Following the money

The biggest and most important difference between the Montreal Protocol and our current carbon markets is that the currency of Montreal was money. 

In creating the carbon markets, we’ve created a new type of currency — the carbon credit. As with all new currencies, there’s an established period of defining what the value should be, and until that value stabilizes within a reliable range, the market tends to attract more speculators than builders. Speculators appreciate that the value can span a large range and builders want to have guarantees that their effort over years can yield a forecastable internal rate of return.  

The Montreal Protocol avoided this by following a simpler paradigm. Instead of creating a new currency, they simply had polluters pay. If we could move to a world where carbon polluters pay, and carbon sequesters get paid, then we need not stress about valuing a new currency. Builders could simply plan based on a known fee/reward structure.

So where does the money to pay the sequesters come from? It could come in large part from what the polluters pay, especially in the early days where there are far more carbon polluters than sequesters.  There’s also a coherent financial framework that could be applied now that we have enough years of intensifying climate disaster to know that the financial magnitude of damage is huge — making sequestration schemes seem like a huge bargain in comparison. Current estimates of annual climate damages in the U.S. were $182 billion in 2024 along a growing trajectory. These numbers massively outstrip the single digit billions that are currently in circulation in the carbon markets. 

One could create a simple model of incremental damage from changing atmosphere and price it out to the ton. This is referred to as the social cost of carbon, and a 2022 Princeton study estimated it at $185 per ton. You need to burn about 2.5 barrels of oil to get one ton of CO2e, so fully pricing in the externality would roughly double the cost of oil. This could be the goal we price up to, as we phase in polluter pays/sequester gets paid over the course of 25 years. There could even be a pre-defined schedule, making it easier for businesses to plan for the future. 

Lastly, as we discover more about how natural systems are behaving under a climate destabilized world, we can update the cost of carbon calculation to price this appropriately. For example, if we were to discover that permafrost melt is creating a “methane bomb” threat scenario, the price of greenhouse gas emissions should rise dramatically to incentivize more rapid transition to decarbonized solutions.

We need to remember that none of the current market design for carbon credits is a permanent law of nature. They’re agreements we decided on and can rewrite if they aren’t achieving what we must achieve. The many generations after us will have to live with the decisions we make, including the decision to not fix the carbon credit market during the years where an avoided or sequestered ton could make the most difference. For those keeping score, that time is now.