How do carbon markets work?
In a nutshell carbon markets refer to trading platforms that allow carbon credits to be traded and purchased.
One carbon credit tradable equals one ton of carbon dioxide, or a similar of another greenhouse gas that has been reduced to a minimum, sequestered or eliminated.
Why are carbon markets so important?
Recently the Intergovernmental Panel on Climate Change (IPCC) issued a new report on the world’s progress toward slowing the pace of climate change. The bad news is that Greenhouse gas (GHG) emissions are increasing across all major sectors worldwide, though at a slower rate. The good news is that renewable energy sources are becoming affordable and often less expensive than oil, coal and gas.
Even with some improvements, the planet faces a huge problem. Scientists warn that 2 degrees Celsius of warming will be surpassed in the 21st century, unless we can achieve significant reductions in GHG emissions today.
A successful action will require adequate and concerted investment in the knowledge that the cost of not taking action will be much higher. The developing world will require at least $6 trillion by 2030 to fund just a fraction of their climate targets (as stated as part of the Nationally Determined Contributions, also known as NDCs).
The most recent IPCC report shows that every country is falling far short, with flows of money at a rate of three to six times less than the levels required in 2030. There are even strikingly different in certain regions around the globe.
So, how can we facilitate and finance the change needed to solve this climate catastrophe? Many countries are looking at carbon markets as a part of the solution.
How many carbon markets exist?
There are two main types in carbon market: voluntary and compliance.
Markets for compliance are developed by any national, regional or international policy or regulation.
Voluntary carbon markets – both national and international are the issue or buying and selling of carbon-based credits on a basis of voluntary.
The present supply of voluntary carbon credits is mostly provided by private firms that create carbon projects or from governments who develop programs that are certified by carbon standards to generate emissions reductions or removals.
The demand comes from private citizens who want to offset their carbon footprint, companies that have sustainability goals for their companies and other actors who wish to trade their credits at a higher cost in order to make money.
Are there any examples of using a carbon credit exchange?
One kind of compliance market that a lot of people are familiar with are the emissions trading systems (ETS). They operate on a “cap-and-trade” principle Regulated businesses – or even countries, in the EU’s ETS are issued pollution or emission permits, or allowances, by government officials (which can be used to reach an overall maximum (or capped) amount). Polluters who exceed their permissible emissions are required to purchase permits from those who have permits to purchase (i.e. trade).
The European Union launched the world’s first international ETS in 2005. The year before, China launched the world’s largest ETS that is estimated to cover approximately one-seventh of the global carbon emissions resulting from the burning of fossil fuels. A number of subnational and national ETS are currently in operation or in development.
How do carbon markets work?