- Carbon markets serve as a mechanism for assigning a value to carbon emissions, facilitating the exchange of carbon credits with the overarching aim of mitigating emissions.
- These markets create incentives for reducing emissions and enhancing energy efficiency.
- For instance, an industrial facility surpassing emission standards can accrue credits, while another struggling to meet the prescribed standards can purchase these credits to demonstrate compliance. The former earns revenue by selling credits, and the latter fulfills its operational obligations.
- They establish trading systems enabling the buying and selling of carbon credits or allowances.
- A carbon credit, adhering to United Nations standards, represents one metric ton of carbon dioxide removed, reduced, or sequestered from the atmosphere.
- Carbon allowances or caps are determined by countries or governments in alignment with their emission reduction targets.
- Article 6 of the Paris Agreement outlines the utilization of international carbon markets by countries to fulfill their NDCs (Nationally Determined Contributions).
- NDCs are commitments made by countries outlining targets for achieving net-zero emissions.
TYPES OF CARBON MARKET
Compliance Markets:
- Compliance markets are established by policies at the national, regional, and/or international levels, subject to official regulation.
- Predominantly operating under the “cap-and-trade” principle, widely adopted in the European Union (EU).
- The EU’s emissions trading system (ETS), initiated in 2005, involves member countries setting emission caps for various sectors, including power, oil, manufacturing, agriculture, and waste management, aligned with climate targets.
- Entities receive annual allowances or permits from governments, corresponding to the permissible emissions.
- Companies exceeding the allocated emission limit must purchase additional permits, constituting the trading aspect of cap-and-trade.
- Market prices for carbon are determined through trading between buyers and sellers of emissions allowances.
- Voluntary Markets:
- Voluntary markets involve emitters such as corporations and private individuals purchasing carbon credits to offset one tonne of CO2 or equivalent greenhouse gases.
- Carbon credits are generated by activities reducing CO2, like afforestation.
- Corporations seeking to offset their unavoidable GHG emissions buy credits from entities engaged in emission reduction, removal, capture, or avoidance projects.
- In sectors like aviation, airlines may buy carbon credits to offset their flight-related carbon footprints.
- Credits in voluntary markets are verified by private firms adhering to recognized standards. Platforms and registries facilitate the purchase of certified credits online.
STATUS OF GLOBAL CARBON MARKET (2021):
- Global markets for tradable carbon allowances or permits experienced a remarkable 164% growth, reaching a record value of 760 billion euros (USD 851 billion), with the EU’s ETS contributing significantly (90% of the total).
- Voluntary carbon markets, focused on offsetting emissions, had a smaller global value at USD 2 billion.
- The World Bank estimates that carbon credit trading could potentially reduce the cost of implementing Nationally Determined Contributions (NDCs) by over half, up to USD 250 billion by 2030.
CHALLENGES TO CARBON MARKET
- Poor Market Transparency:
- The UNDP (United Nations Development Programme) highlights significant concerns within carbon markets, including issues such as double counting of greenhouse gas reductions, the quality and authenticity of climate projects generating credits, and overall poor market transparency.
- Greenwashing:
- Companies participating in carbon markets may engage in greenwashing, where they purchase credits to offset their carbon footprints without making substantial efforts to reduce overall emissions or invest in cleaner technologies.
- Potential Net Emission Increase through ETS (Emissions Trading System):
- In regulated or compliance markets, particularly those operating under ETS, there is a risk that these systems may not automatically reinforce climate mitigation efforts.
- The International Monetary Fund (IMF) raises concerns that including high-emission sectors in trading schemes, allowing them to offset emissions by purchasing allowances, may lead to a net increase in emissions. Such systems may lack automatic mechanisms for prioritizing cost-effective projects in the offsetting sector, potentially undermining their effectiveness.
WAY AHEAD
- Urgent Emission Reductions:
- To limit global warming to 2°C, and ideally 1.5°C, it is imperative to achieve a reduction in global greenhouse gas (GHG) emissions by 25 to 50% throughout this decade.
- Nationwide Commitments (NDCs):
- Nearly 170 countries have submitted their nationally determined contributions (NDCs) as part of the 2015 Paris Agreement, with commitments to update these every five years.
- Regular NDC Updates:
- The commitment to regularly update NDCs ensures that countries continuously reassess and enhance their climate actions, aligning them with the latest scientific and environmental developments.
- Real Emission Reductions and Removals:
- The success of carbon markets relies on ensuring that emission reductions and removals are genuine and in accordance with a country’s NDCs. This emphasizes the importance of concrete actions and outcomes rather than mere transactions.
- Transparency in Transactions:
- Transparency is identified as a key factor in the institutional and financial infrastructure supporting carbon market transactions. Clear and transparent processes contribute to building trust and credibility in the functioning of carbon markets.
- Alignment with Global Goals:
- Carbon market activities should align with broader global goals, including the commitment to limit temperature rise. Ensuring that carbon markets contribute effectively to overarching climate objectives is essential for their success.
- International Cooperation:
- Collaboration among nations is crucial for the success of global climate initiatives. Countries must work together to share knowledge, technologies, and financial resources to collectively address climate challenges.
- Enhanced Monitoring and Reporting:
- Robust monitoring and reporting mechanisms are essential to track the progress of emission reduction efforts. Regular assessments help identify challenges, assess the effectiveness of measures, and guide future actions.
- Innovation and Technology Adoption:
- Encouraging innovation and the widespread adoption of sustainable technologies can significantly contribute to achieving emission reduction targets. Investments in research and development are key to advancing solutions for a low-carbon future.
- Adaptation Strategies:
- In addition to mitigation efforts, there is a need for comprehensive adaptation strategies to address the impacts of climate change. Building resilience and adapting to changing conditions are integral components of a holistic climate action plan.
FAQs – Carbon Markets
1. What is the purpose of carbon markets?
- Carbon markets serve as a mechanism for assigning a value to carbon emissions, facilitating the exchange of carbon credits with the overarching aim of mitigating emissions.
2. How do carbon markets create incentives for emission reduction?
- Carbon markets create incentives by allowing entities that surpass emission standards to accrue credits. Struggling entities can purchase these credits, demonstrating compliance and enabling the former to earn revenue.
3. What is the role of carbon credits in trading systems?
- Carbon credits, adhering to United Nations standards, represent one metric ton of carbon dioxide removed, reduced, or sequestered. Trading systems facilitate the buying and selling of these credits or allowances.
4. What determines carbon allowances or caps in compliance markets?
- Carbon allowances or caps are determined by countries or governments in alignment with their emission reduction targets.
5. How does the Paris Agreement incorporate international carbon markets?
- Article 6 of the Paris Agreement outlines the utilization of international carbon markets by countries to fulfill their NDCs (Nationally Determined Contributions), which are climate commitments with targets for achieving net-zero emissions.
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