Carbon credits - trading - case studies
Environmental policy - carbon trading - carbon markets.
Author: Charitarth Sindhu, Environmental Sustainability & ESG Consultant.
Carbon credits refer to tradable permits granting the holder the right to emit a specified quantity of carbon dioxide or another greenhouse gas, typically one tonne.
These credits are integral to cap-and-trade initiatives aimed at mitigating greenhouse gas levels by imposing limits on emissions, which are periodically reduced.
Primary types of Carbon credits
Voluntary Emissions Reduction (VER): These are offsets traded in voluntary markets or over-the-counter platforms.
Certified Emissions Reduction (CER): CERs are emission credits traded within regulatory frameworks to counterbalance project emissions.
History of Carbon credits
The concept of carbon credits emerged during the Kyoto Protocols in 1997, developed by the Intergovernmental Panel on Climate Change (IPCC) under the United Nations. These protocols established binding emission reduction targets for participating nations.
Subsequent agreements such as the Marrakesh Accords in 2001 and the Doha Agreement in 2012 refined the system, culminating in the Paris Agreement of 2015, which standardized emission trading guidelines.
At COP 26 in 2021, held in Glasgow, it was agreed to implement emission trading standards outlined in the Paris Agreement. This decision allowed for the transfer of offsets from 2013, resulting in the introduction of 320 million credits into the new market.
Trading Credits
Trading carbon credits occurs in both public and private markets, subject to international regulations governing their transfer. Prices for these credits are determined by supply and demand dynamics, varying between countries.
While carbon credits offer societal benefits, they present challenges for individual investors due to the dominance of certified emissions reduction (CER) products. Large financial institutions manage CERs through specialized carbon funds, enabling broader market access for small investors. Various exchanges, such as the European Climate Exchange and NASDAQ OMX Commodities Europe exchange, facilitate credit trading.
The Paris Agreement's Article 6 outlines three mechanisms for voluntary cooperation:
1. Allowing countries exceeding their climate commitments to sell surplus to those falling short, covering emissions reductions and other initiatives like renewable energy and forest conservation.
2. Proposing the creation of an international carbon market overseen by a UN body to facilitate global emissions trading.
3. Focusing on non-market approaches to formalise climate collaboration among countries through avenues such as development aid and direct trade.
See also
- Cap and trade
- Carbon Border Adjustment Mechanism
- Carbon credits
- Carbon capture
- Carbon credits
- Carbon footprint
- Carbon markets
- Carbon pricing
- Carbon tax
- Carbon trading
- Compliance
- COP26
- Emission trading scheme
- EU Emissions Trading Scheme
- Greenhouse gas
- Offset
- Paris Agreement
- UK Emissions Trading Scheme
- Voluntary carbon markets
