Imagine this:

An international system of carbon offsetting and trading between nations in an attempt to drastically lower greenhouse emissions. What may seem like another futile stab at solving these crises has been implemented globally by private national institutions. Almost a fifth of all global emissions are now covered by a compliance-based carbon market, up from 5% a decade ago (BloombergNEF, 2022). Ever since the Kyoto Protocol, a carbon market framework has been implemented by an increasing number of countries (United Nations, n.d.). In the years since COP21 Paris, which includes a long chain of significant epidemics and economic decline, the need for new strategies has become even more necessary as the velocity and complexity of the world increases. The UN Adaptation Gap Report 2022 highlights the deteriorating effect of ‘too little, too slow’ action: ‘as the climate crisis intensifies, adapting to its fallout is key’ (UN Environment Programme, 2022). The dire issues we face today can be lessened by a universal, foundational market which helps countries with their Nationally Determined Contributions (NDCs), while simultaneously raising climate ambition.

Introducing the Carbon Market

The carbon market is a framework that facilitates trading between buyers and sellers of carbon sequestration in the form of certificates or credits. Markets are split into two categories: compliance and voluntary. Compliance markets (CERs) target entities that emit above 25,000 tonnes of CO2 equivalent per year. A governing body restricts emissions, for example by imposing emission taxes, and legally binds participants to their carbon goals. CERs are a great way for countries to focus on their NDCs more cheaply and efficiently. The World Bank estimated that “trading in carbon credits could reduce the cost of a country’s NDCs by as much as $250 billion by 2030” – more than half of the initial cost (The World Bank, 2022). The most established CER is the EU Emissions Trading System (EU ETS) which ‘decreased by 1,530 million tonnes of carbon dioxide equivalent (MtCO2e) in 2019 to 1,355MtCO2e in 2020, a reduction of 11.4%’ (European Environment Agency, 2022). Some CERs also include a trading process where organisations can buy and sell emission allowances at a price, which is problematic considering the ubiquitous goal of sequestering carbon. Prices are also affected by external factors such as fallout from the invasion of Ukraine, where there were significant price downturns, demonstrating the system’s unreliability. Despite the fluctuating prices, its concrete structure allows for controlled and effective efforts.

Alternatively, the voluntary carbon market (VCM) does not comply with legally binding emissions reduction obligations. Anyone can offset their carbon footprint by purchasing credits from a variety of environmental projects. This could allow for greenwashing, as companies can advertise their emission reductions, whilst gaining financial incentives and marketing benefits. Further expansion of the VCM also presents opportunities for smaller corporations to be involved, which has huge potential considering that companies will likely look to offset any residual emissions in the coming decades after exhausting all other abatement options. Yet the market remains hampered by oversupply and questions of credibility. Stricter regulation could enable VCMs markets to take off and addresses emissions which are unable to be sequestered by alternative means.

Figure 1: BNEF estimates that prices of tCO2e could reach $120 billion in a voluntary market scenario by 2050, compared to a hybrid scenario (evolution of carbon market from voluntary to removals only) and a removal only scenario (for offsets that specifically store/sequester carbon, rather than avoiding emissions) (BloombergNEF, 2022).

Hitting two birds with one stone: Market Incentive and Climate Ambition

Ambition is essential to increase the carbon market’s effectiveness, from more government investment, but also to raise more awareness for environmental issues. Figure 2 uses an Olympic Pool to depict an ideal carbon market: both broad and deep.

Figure 2: ‘Swimming Pool’ graph depicting the 2021 global carbon markets’ effectiveness (BloombergNEF, 2022).

Essentially, there must be ambitious emission reduction goals and a large proportion between the overall regional emissions and the emissions in the carbon market. Evidently, there is a link between ambition concerning the growth of carbon markets, and ambition to resolve NDCs.

Figure 3: Estimated emissions reductions achievable under the base case (current policies) and four scenarios for increased international market coverage, holding total cost constant (Environmental Defense Fund, 2019).

In Figure 3, the majority of increases from global markets are due to international linking: carbon markets in countries cross-trading. This suggests that carbon pricing policies which encourage international cooperation can ensure more cost savings, facilitating more ambitious climate targets. Additionally, strategies like Reducing Emissions from Deforestation and Forest Degradation (REDD+) in markets, enable 38 billion tons (54%) of the total increase in emissions of 70 billion tons possible with full global trading, creating ample opportunity and incentive for actual global investment (Environmental Defense Fund, 2019). Carbon markets create a virtuous cycle of economic and environmental growth.

Regulating the Carbon Market

To encourage global investment in carbon markets, top-down regulation from a major organisation must exist. Luckily, one of the outcomes of the Glasgow COP26 climate summit was the introduction of a new mechanism under Article 6, which allows countries to voluntarily cooperate to achieve their emissions pledges and NDCs. Countries will be able to transfer carbon credits earned from the reduction of GHG emissions to help other countries meet climate targets. In the CER, emission reductions authorized for transfer may be sold to another country. In order to prevent double counting which might overestimate global emission targets, Article 6 established an accounting system called ‘corresponding adjustment’. Effectively, the agreement reinforced the carbon market, which had previously been messy (inaccurate as a result of double counting) and ineffective (prices were too low to deliver genuine emission reductions). However, the Article only set out the principles of the market, without creating a full framework, through a period of six years. Crucially, it also failed to regulate the VCM, which is arguably more important in unlocking the potential of natural climate solutions (NCS), as it allows all kinds of bodies to voluntarily purchase carbon credits, and to compensate for residual emissions. (United Nations, n.d.) These two markets both play very different roles in reducing emissions, but they need each other in order to succeed. Neglecting one and focusing solely on another is damaging to the entire system. Reinforcing new global systemic changes is time-consuming and requires cooperation from every world leader, many of whom are not ready to prioritise the dying world.

A Greener Future?

Like the parable of the house on sand and rock, global climate efforts need to be built on a sure foundation. Presently, these strategies are failing due to many external factors, such as political unrest, economic rehabilitation, and Covid-19. Inevitably, these are all linked to global warming: e.g., zoonotic diseases have a direct link to the changing environment – deforestation causes viruses to shake onto a new host such as humans, thus creating pandemics (Schwab & Malleret, 2020). A central goal of the Paris Agreement was to limit global warming annual increments to 1.5 degrees Celsius, which, in our current global infrastructure, may seem impossible. This is why many institutions have begun investing in carbon markets. A systematic change is imperative for achieving climate pledges. Perhaps a more drastic, new globalised currency with the sole goal of sequestering carbon will arise, unshackled by the unwillingness of nations. Perhaps nations will only become willing to embrace these solutions when devastating ecological disasters strike their land.

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