Unlike the 1997 UN Kyoto Protocol Agreement, the 2015 Paris Climate Agreement commits all signatories, not just the most advanced economies, to adopt carbon emission targets.
This international agreement on climate was adopted by 196 countries with the aim of limiting global warming to below 2°C, preferably to 1.5°C, compared to pre-industrial levels.
Governments around the world try to achieve these carbon targets through taxation, by imposing restrictions on companies that emit greenhouse gases or simply by creating a market that can be traded in carbon allowances, also called carbon permits, offsets or credits.
If implemented successfully, analysts believe that international emissions trading could reduce global emissions by 60%-80% by 2035. However, this method has left many with mixed feelings about its true environmental impact.
Unpacking the carbon trade
A carbon allowance exists when the government determines the amount of carbon dioxide (CO2) that can be emitted by industry. This is divided into permits and giving or selling those permits to companies. If the company doesn’t use all the allowances, it can sell what it doesn’t need. If you need more, you can buy a permit from a company that has reserves.
This system is referred to as “cap-and-trade”. All cap-and-trade systems have emission limits that meet government targets for limiting environmental damage. Every year the compliance cap gets tighter, and the dwindling permits get more expensive.
There are two types of carbon credits sold – voluntary credits and mandatory (compliance) credits. The voluntary market offers individuals, companies or governments that choose to reduce their own carbon footprint, the ability to purchase carbon offsets from sources outside the compliance market.
For example, by buying carbon credits behind reforestation projects, such as planting trees to absorb CO.2 from the atmosphere. Voluntary carbon credit trading is now mostly done through relatively unregulated bilateral negotiations.
Details of projects and certified credits are stored in registries maintained by credit programs, such as Washington-based Verra and Switzerland-based Gold Standard.
Mandatory (compliance) markets are created and governed by mandatory national, regional, or international carbon reduction regimes. Carbon trading is a legal scheme that covers total carbon emissions and allows organizations to trade allocations on the market.
For example, in the EU system, it is mandatory for protected companies to buy these allowances in an auction or secondary market. At the end of the year, the allowance was handed over to the European Commission.
The money collected from the system is used, for example, for investments that promote the use of cleaner energy, hopefully reducing the EU’s carbon footprint. The money collected also funds social redistribution, for example, to disadvantaged and poor households that carry additional energy costs as a result of the emissions trading system.
Funding the gap
Although carbon markets sound good in theory, in practice they are not. The first international carbon market was established under the 1997 Kyoto Protocol on climate change. However, after widespread reports of abuse, the market collapsed.
Since then, there has been no consensus on how best to implement a “cap-and-trade” system around the world. The EU emissions trading system, launched in 2005, is the oldest active carbon market. Other schemes operate in Canada, Japan, New Zealand, South Korea, Switzerland and the US.
By 2021, China is launching 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 potential domestic standards framework that will ensure the return of carbon credits that are used as part of the country’s carbon allowance mitigation.
Climate campaigners argue that too much focus on spreading pollution obscures the fundamental need for all countries to transition away from fossil fuels in the future.
This transition is the main driver to avoid severe and irreversible damage to the natural environment. Buying carbon credits should therefore be like gap financing – closed and dependent on investments made in carbon reduction technologies.
By Vijay Vaitheeswaran, The Economist‘s global energy and climate innovation editor, there is potential for the carbon trading system to start receiving the original goal that helps to decarbonize the world. This applies especially in the EU, where carbon credit trading is seen less as a greenwashing exercise, and more seriously as a safety regulation. However, this has not been the case in many parts of the world.
Therefore, a concerted effort of government commitment to make carbon trading more attractive is urgently needed. This can be done by increasing carbon credit prices and fines, and by establishing a globally integrated and regulated carbon market, thereby creating a solid foundation for sustainable global climate behavior change.
The views expressed are those of the author and do not necessarily reflect official policy or position Mail & Guardians.