Carbon markets - case studies
Environmental policy - emission trading schemes.
Author: Charitarth Sindhu, Environmental Sustainability & ESG Consultant
Carbon markets are mechanisms designed to assign a value to the exchange of carbon permits or credits, allowing companies to emit a specific quantity of carbon dioxide or other greenhouse gases. These markets facilitate the buying and selling of carbon emissions with the aim of curbing global greenhouse gas emissions.
Carbon credit market under the Paris Agreement
The initial international carbon market originated under the Kyoto Protocol in 1992 and was subsequently replaced by the Paris Agreement in 2020.
The Paris Agreement outlines several provisions regarding Carbon Markets:
- Article 6 sets the framework for establishing a new carbon market.
- Article 6.2 outlines bilateral arrangements for the transfer of emissions reductions.
- Article 6.4 establishes a broader carbon market where reductions can be traded by any party.
- Article 6.8 presents non-market approaches that countries can employ to meet their targets.
Types of carbon markets
Compliance markets:
These are legally regulated markets established by national, regional, or international policies, operating on the cap-and-trade principle.
For instance, the European Union’s emissions trading system (ETS), inaugurated in 2005, sets emission caps for sectors like power, oil, manufacturing, agriculture, and waste management. These caps are determined according to each country's climate objectives and are progressively reduced to mitigate emissions.
Voluntary markets:
These are markets where entities emitting greenhouse gases purchase carbon credits to offset their emissions by one tonne of carbon dioxide or equivalent greenhouse gases. In this market, entities seeking to compensate for unavoidable emissions acquire carbon credits from projects such as afforestation, which reduce, remove, capture, or prevent emissions.
Challenges in carbon markets
Inadequate market transparency:
Issues include double counting of greenhouse gas reductions, doubts about the quality and authenticity of climate projects generating credits, and insufficient market transparency.
Greenwashing:
Some companies may buy credits to offset carbon footprints without genuinely reducing overall emissions or investing in cleaner technologies.
Increasing net emissions through ETS:
Emissions trading systems (ETS) may not effectively reinforce climate mitigation efforts. Sectors with high emissions participating in trading schemes offset their emissions by purchasing allowances, potentially increasing net emissions without prioritising cost-effective projects in offsetting sectors.
See also
- Cap and trade
- Carbon capture
- Carbon credits
- Carbon footprint
- Carbon markets
- Carbon pricing
- Carbon trading
- Compliance
- Emission trading scheme
- EU Emissions Trading System
- Greenhouse gas
- Greenwash
- Offset
- Paris Agreement
- Peak oil
- Price transparency
- UK Emissions Trading Scheme
- Voluntary carbon markets
