Unlike the 1997 United Nations Kyoto Protocol Agreement, the 2015 Paris Climate Agreement commits all signatories, not just the most developed economies, to imposing carbon emissions targets.
This international climate treaty was adopted by 196 countries with the goal of limiting global warming to well below 2°C, preferably 1.5°C, compared to pre-industrial levels.
Governments around the world are trying to achieve these carbon targets through taxation, imposing limits on companies that emit greenhouse gases, or facilitating the creation of tradable markets in carbon emission rights, also known as permits, offsets. or carbon credits.
If implemented successfully, analysts believe that international emissions trading could reduce global emissions by 60-80% by 2035. However, this method leaves many with mixed feelings about its true environmental impact.
Unpacking carbon trading
Carbon allowances exist when a government sets a limit on the amount of carbon dioxide (CO2) that can be issued by an industry. Divide the cap into permits and grant or sell these permits to businesses. If a business doesn’t use all of its allocation, it can sell what it doesn’t need. If you need more, you can buy permits from those companies with spare parts.
This system is known as “cap-and-trade”. All cap-and-trade systems have emission limits that are compatible with the government’s goal of limiting environmental damage. Each year, the enforcement cap gets tighter and the dwindling number of permits gets more expensive.
There are two general types of carbon credits traded: voluntary credits and mandatory (compliance) credits. The voluntary market offers individuals, companies or governments that choose to mitigate their own carbon footprint, the ability to purchase carbon offsets from sources outside of the compliance market.
For example, by purchasing carbon credits on the back of reforestation projects, such as planting trees to absorb CO2 of the atmosphere. Currently, voluntary exchanges of carbon credits are mainly carried out through relatively unregulated bilateral negotiations.
Project details and certified credits are deposited in registries managed by credit programs such as Washington-based Verra and Switzerland-based Gold Standard.
Mandatory (compliance) markets are created and regulated by national, regional or international mandatory carbon reduction regimes. Carbon trading is a legally binding scheme that limits total carbon emissions and allows organizations to trade their allocation on a market.
For example, in the EU system, it is mandatory for companies that are covered to buy allowances at auction or on the secondary market. At the end of the year, these rights are handed over to the European Commission.
The money raised from the system is spent, for example, on investments that promote cleaner uses of energy to hopefully further reduce the EU’s carbon footprint. The money raised also goes to social redistribution funds, for example, to the poorest and most disadvantaged households who bear additional energy costs as a result of the emissions trading system.
financing the gap
Although carbon markets sound great in theory, in practice they are not. The first international carbon market was established under the 1997 Kyoto Protocol on climate change. However, following widespread reports of abuse, the market crashed.
Since then, there has been no consensus on the best way to implement a global cap-and-trade system. The EU Emissions Trading System, launched in 2005, is the oldest market for activated carbon. Other schemes are operating in Canada, Japan, New Zealand, South Korea, Switzerland, and the US.
In 2021, China launched the world’s largest carbon market for its thermal power industry. The sector accounts for 40% of China’s total emissions, equivalent to double the emissions covered by the EU carbon market.
South Africa plans to develop a framework for possible national standards to ensure the generation of carbon credits used as part of the mitigation of the country’s carbon allowances.
Climate activists argue that too much focus on simply redistributing pollution obscures the fundamental need for all countries to transition away from fossil fuels in the near future.
This transition is a key factor in avoiding severe and irreversible damage to the natural environment. Therefore, the purchase of carbon credits should be like deficit financing: limited and contingent on investments made in carbon reduction technologies.
According to Vijay Vaitheeswaran, The EconomistPublisher of Global Innovation in Energy and Climate, there is potential for carbon trading systems to start achieving their original goal of helping to decarbonize the world. This is especially true in the EU, where carbon credit trading is seen less as a greenwashing exercise, and more as a safety regulation. However, this is not yet the case in many other parts of the world.
Therefore, the combined efforts of governments’ commitment to make carbon trading more attractive are urgently required. This can be achieved by increasing the prices of carbon credits and penalties, and by establishing globally regulated and integrated carbon markets, thereby laying a solid foundation towards sustainable global climate behavior change.
Opinions expressed are those of the author and do not necessarily reflect official policy or the position of the Mail and Guardian.
