Carbon Markets

- Overview

Putting a price on carbon is essential to drive the technological and behavioural innovation necessary to limit climate change. Market-based instruments, such as cap-and-trade emission trading schemes, are crucial to price carbon emissions and keep the costs of climate action low. A cap-and-trade scheme enables emitters to trade allowances for the right to emit up to their allowed limit or "cap". 

Carbon markets operate under a few different names, including informal labels like "cap-and-trade" systems or the more bureaucratic term "emissions trading scheme." But fundamentally, they do one thing: provide incentives to reduce pollution and fight global warming through both regulated and voluntary carbon markets. 

There is rising global support for these market-based initiatives as part of the transition to a more sustainable global economy. The launch of China's first national carbon trading market in February, 2021 marks an important new development in these markets, and President Biden is racing to roll out a comprehensive emissions reduction strategy in the US. As these regions begin these efforts, Europe's mature Emissions Trading System continues to thrive after seeing a record 8 billion emission allowances traded in 2020. The UK is also in the process of setting up its own emissions trading scheme after having left the EU regime as part of Brexit. Not all carbon markets are the same, however, and they continue to evolve differently. 

- Carbon Trading

Carbon trade is the buying and selling of credits that permit a company or other entity to emit a certain amount of carbon dioxide. The carbon credits and the carbon trade are authorized by governments with the goal of gradually reducing overall carbon emissions and mitigating their contribution to climate change. Carbon trading is also referred to as carbon emissions trading. 

Carbon markets already exist within some countries and regions. In some, like the “cap-and-trade” systems used by the E.U. and California, the government puts a cap on the amount of greenhouse gases that can be emitted by a given industry or sector of the economy. Businesses are then given an allowance of how many metric tons of CO₂ they can emit. Those who emit less than their allotment can sell the extra to other businesses, pushing everyone to cut down emissions faster. 

The main international carbon market scheme existing today was set up under the U.N.’s 1997 Kyoto protocol on climate change. Under that agreement, developed countries had targets to reduce their greenhouse gas emissions, but developing countries did not. So if a developing country reduced its emissions by building a solar panel plant or planting trees for example, they could sell a “credit” to a developed country, which could count that emission reduction in its own target.

In July 2021, China started a long-awaited national emissions-trading program. The program will initially involve 2,225 companies in the power sector and is designed to help the country reach its goal of achieving carbon neutrality by 2060. It will be the world's largest carbon market. That made the European Union Emissions Trading System the world's second-largest carbon trade market. The EU's trading market is still considered the benchmark for carbon trading.

[Amager Bakke , also known as Amager Slope or Copenhill, is a combined heat and power waste-to-energy plant and sports facility in Amager, Copenhagen, Denmark - Civil Engineering Discoveries]

- The Article 6 for Carbon Markets

Getting an agreement on the rules for international trading of carbon credits, a set of negotiations known as Article 6, came down to the wire in October, 2021 at the COP26 (the 26th Conference of the Parties to the United Nations Framework Convention on Climate Change.) But during the conference, the 200 countries finally agreed upon guidelines that will create an international market for carbon credits, including country-to-country exchanges of these instruments. 

For companies that buy offsets and the two big verification organizations, Verra and The Gold Standard, Article 6 is the long-awaited government guidance for creating, accounting and verifying carbon credits that until this point the private sector had been developing largely on an ad hoc basis.

Article 6 covers the ways countries can work together to generate deeper emission reductions and produce more ambitious national climate action plans, called “Nationally Determined Contributions” (NDCs) to the Paris Agreement. It includes cross-border compliance carbon markets, described as “ITMOs” (Internationally-Transferred Mitigation Outcomes).

To avoid double-counting of emission reductions, the Paris Agreement calls for rules on applying “corresponding adjustments” of national carbon inventories when one country uses ITMOs to reduce its carbon footprint. This can happen at the government level, as when Switzerland purchased ITMOS from Peru, but is more likely to happen at the corporate level, when a company in one country purchases ITMOs from abroad to meet compliance criteria at home.  

Voluntary carbon markets are also designed to reduce overall emissions, but the transactions themselves are not registered in national carbon accounts. 

- Carbon Neutrality

Carbon neutral was the New Oxford American Dictionary‘s word of the year in 2006 – and since then, has been catapulted into the mainstream world. By definition, carbon-neutral (or carbon neutrality) is the balance between emitting carbon and absorbing carbon emissions from carbon sinks. Or simply, elimination all carbon emissions altogether. Carbon sinks are any systems that absorb more carbon than they emit, such as forests, soils and oceans. 

According to the European Union Commission, natural sinks remove between 9.5 and 11 Gt of CO₂ per year. To date, no artificial carbon sinks can remove carbon from the atmosphere on the necessary scale to fight global warming. Hence, to become carbon-neutral, companies have two options: reducing drastically their carbon emissions to net-zero or balancing their emissions through offsetting and the purchase of carbon credits.

Let’s deep dive into the core of carbon-neutrality:

• Carbon neutral means that any CO₂ released into the atmosphere from a company’s activities is balanced by an equivalent amount being removed.
• Climate positive means that activity goes beyond achieving net-zero carbon emissions to create an environmental benefit by removing additional carbon dioxide from the atmosphere.
• Carbon negative means the same thing as “climate positive.”
• Carbon positive is how organisations describe climate positive and carbon negative. It’s mainly a marketing term, and understandably confusing–we generally avoid it.
• Climate Neutral refers to reducing all GHG to the point of zero while eliminating all other negative environmental impacts that an organisation may cause.
• Net-Zero carbon emissions mean that an activity releases net-zero carbon emissions into the atmosphere.
• Net-Zero emissions balance the whole amount of greenhouse gas (GHG) released and the amount removed from the atmosphere.

- Carbon Footprints

A carbon footprint is the total greenhouse gas (GHG) emissions caused by an individual, event, organization, service, place or product, expressed as carbon dioxide equivalent (CO_2e). Greenhouse gases, including the carbon-containing gases carbon dioxide and methane, can be emitted through the burning of fossil fuels, land clearance and the production and consumption of food, manufactured goods, materials, wood, roads, buildings, transportation and other services. 

In most cases, the total carbon footprint cannot be calculated exactly because of inadequate knowledge of data about the complex interactions between contributing processes, including the influence of natural processes that store or release carbon dioxide. For this reason, Wright, Kemp, and Williams proposed the following definition of a carbon footprint: "A measure of the total amount of carbon dioxide (CO₂) and methane (CH₄) emissions of a defined population, system or activity, considering all relevant sources, sinks and storage within the spatial and temporal boundary of the population, system or activity of interest. Calculated as carbon dioxide equivalent using the relevant 100-year global warming potential (GWP100)."

The global average annual carbon footprint per person in 2014 was about 5 tonnes CO_2e. Although there are many ways to calculate a carbon footprint, the Nature Conservancy suggests that the average carbon footprint for a U.S. citizen is 16 tons. This is one of the highest rates in the world.