Reducing greenhouse-gas emissions has become an urgent necessity, as countries around the world witness the worsening effects of climate change. Carbon-reduction and adaptation measures must accelerate, and carbon markets provide an option to offset the costs of transitioning away from fossil fuels and moving towards a green economy.
Despite their inception more than two decades ago, carbon markets have only seen their current momentum in recent years with the increase in green policies aimed at achieving carbon neutrality.
The idea of carbon markets is linked to the concept of carbon neutrality. Countries or companies can compensate for their emissions to the same extent that they caused them, reaching what is known as carbon footprint neutralisation.
However, despite all the renewable sources of energy now available and the various carbon-removal technologies, there are still sectors whose emissions are difficult to eliminate, meaning that carbon offsetting can be a better solution.
Although the momentum for mandatory emissions-trading systems has increased, most of these only apply to the electricity and manufacturing sectors. However, voluntary carbon markets are also growing, with companies that do not fall under mandatory regulations wanting to reduce their emissions under pressure from investors and consumers who require companies to act more sustainably for the well-being of the planet.
CARBON MARKETS: The idea of carbon markets began in 1997, when 180 countries signed the Kyoto Protocol that saw the richest countries pledging to reduce their emissions of greenhouse gases by paying for the development of low-carbon projects in poorer countries.
The aim was to reduce greenhouse-gas emissions up until 2012 by about five per cent below 1990 levels.
It turned out that this goal was overly ambitious in a world that had become addicted to fossil fuels. The US withdrew from the Kyoto Protocol in 2001, and other countries followed suit later.
Efforts to establish a global market for carbon trading have so far failed, despite this being confirmed in Article 6 of the Paris Climate Agreement signed in 2015. The European Union was the first to take a step in the right direction by establishing an emissions-trading system in 2005 that currently covers more than 40 per cent of the region’s total emissions.
As of April 2020, there were 23 carbon-trading systems in place in countries such as Kazakhstan, South Korea, Mexico, New Zealand, Switzerland, and Canada and covering nine per cent of global emissions, according to the International Energy Agency (IEA).
There are more than 60 carbon-trading programmes at the local and national levels. China also launched its own emissions-trading system last year. Carbon-pricing initiatives cover approximately 20 per cent of total global emissions.
At the UN COP26 Climate Summit in the UK in 2021, the world’s countries finally agreed on Article 6 of the Paris Climate Agreement that is likely to strengthen carbon-market mechanisms. It allows countries to buy emissions reductions abroad and use them to achieve their own reduction goals. This also applies to companies, hence the introduction of voluntary carbon markets.
In a mandatory carbon market, companies are obligated to buy carbon credits when their emissions exceed a certain threshold through permits issued by governments, as in the European Emissions Trading System.
Companies that emit less than the permissible limit can sell their additional permits to other entities that emit more, thus allowing the latter to avoid penalties imposed by the government under an emissions-trading system.
Voluntary carbon markets as their name suggests are optional, and they allow companies that plan for carbon neutrality and do not fall under national emissions-trading systems to achieve emissions reductions, whether by avoiding emissions by planting trees, for example, or by removing these emissions through the use of technology such as carbon capture and storage.
Voluntary carbon markets enable emissions reductions along the value chain, while mandatory markets cover direct emissions only.
Voluntary carbon credits or carbon offsets are financial instruments issued by developers to avoid or remove greenhouse-gas emissions from the atmosphere. Each offset must show that one ton of carbon dioxide or the equivalent greenhouse gas has been removed.
Voluntary carbon credits allow emitters to offset their unavoidable emissions by purchasing carbon credits issued by projects aimed at removing or reducing greenhouse-gas emissions from the atmosphere.
Carbon offsetting: A carbon offset refers to units obtained by companies that have implemented a project to reduce greenhouse gases.
They are issued by a governing board or government body, and one offset credit is awarded for each ton of greenhouse gases that are reduced, stored, or avoided. The offset is then sold to an investor, government, or NGO to offset their emissions or for investment purposes.
Typically, carbon offsets are measured in tons of greenhouse gases, which include carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, HFCs, and perfluorocarbons.
Different types of carbon offsets may include the capture of greenhouse gases for use or destruction, the reduction of greenhouse gases by reducing the amount of fuel or the electricity needed to perform various activities, the capture and storage of greenhouse gases, and the reduction of carbon emissions by moving from fossil fuels to renewable energy sources such as solar and wind energy.
In mandatory carbon markets, the carbon price varies depending on a country’s emissions-trading system. Carbon prices in Europe differ from, say, China and Canada, for example. The International Monetary Fund (IMF) is calling for a global carbon price to contribute more to reducing emissions, taking into account the nature of each country.
According to the IMF, the minimum carbon price should be $75 per ton for advanced economies by 2030, $50 for high-income emerging market economies like China, and $25 for low-income countries like India.
Recently, the price of carbon in Europe reached more than 90 euros per ton ($100). In Canada, the government aims to raise the carbon price to 170 Canadian dollars ($136) by the end of the decade.
In voluntary markets, the average price of carbon offsets currently traded is about $5 per ton, according to Wood Mackenzie, a UK-based consultancy. The price of carbon offsets in these non-mandatory markets is determined by the category of projects and their quality in reducing emissions.
Forestry, land use, and renewable-energy projects are the most popular categories for compensation, with land-use projects trading at prices five times higher than renewable energy, according to the Dutch investment bank ING.
EMISSION CALCULATIONS: Global greenhouse-gas emissions currently stand at approximately 50 gigatons per year (6.6 tons per person) and were estimated for 2019 at 57 gigatons of CO2 equivalent, including five gigatons due to land-use change.
In 2019, approximately 34 per cent (20 gigatons CO2 equivalent — 20 GtCO2e) of total net anthropogenic greenhouse-gas emissions came from the energy supply sector, 24 per cent (14 GtCO2e) from industry, and 22 per cent (13 GtCO2e) from agriculture and similar. 15 per cent (8.7 GtCO2e) came from transportation, and six per cent (3.3 GtCO2e) came from buildings.
Carbon dioxide (CO2), nitrous oxide (N2O), methane, three groups of fluorinated gases (sulphur hexafluoride (SF6), hydrofluorocarbons (HFCs), and perfluorocarbons (PFCs)) are the main anthropogenic greenhouse gases regulated under the 2015 Paris Agreement.
Emissions can be tracked over long periods of time, known as historical or cumulative emissions metrics. Cumulative emissions provide some indication of who is responsible for the build-up of greenhouse gas concentrations in the atmosphere.
The balance of national accounts tracks emissions based on the difference between a country’s exports and imports. For many rich countries, the balance is negative because more goods are imported than exported. This result is mostly due to the fact that it is cheaper to produce goods outside developed countries, leading to developed countries becoming more dependent on services rather than goods.
A positive balance in the account means that more production has been happening within a country, as more factories in operation will increase carbon-emission levels.
Emissions can also be measured over shorter time periods. Changes in emissions can, for example, be measured against the base year of 1990. This has been used in the UN Framework Convention on Climate Change as the base year for emissions, and it is also used in the Kyoto Protocol (some gases are also measured from 1995).
Looked at from today’s perspective, the volume of carbon offsets sold within voluntary markets rose to more than $1 billion for the first time in 2021, according to ING.
The US management consultants McKinsey estimate that demand for carbon offsets could increase 15 times or more by 2030 and about 100 times by the middle of this century. The annual global demand for carbon credits could range between 1.5 and two gigatons of carbon by 2030 and between seven and 13 gigatons by mid-century, it says.
Overall, the carbon-credits market could be worth more than $50 billion in 2030.
Under Article 6 of the Paris Agreement, countries will be able to cooperate in different ways to achieve their climate goals. A key factor for success in reducing global greenhouse-gas emissions could be the use of digital infrastructure that ensures that verified data are secure and that reductions are accurately calculated and tracked.
There are two important factors to driving the growth of voluntary carbon markets. First, civil society-led initiatives provide guidance to inform companies about when and how carbon credits can be used as part of credible corporate climate commitments. But they should only be used to compensate for a small volume of residual contamination that cannot be eliminated otherwise.
The second factor driving voluntary carbon markets to grow is ensuring the quality and expanding the quantity of offset credits.
Last year, and coinciding with Egypt’s hosting of the UN COP27 Climate Summit in Sharm El-Sheikh, Prime Minister Mustafa Madbouli launched the Voluntary Carbon Market Platform, the first platform for voluntary carbon markets in Egypt.
Overall, a voluntary carbon market is a valuable tool in the fight against climate change. By providing a way for companies, organisations, and individuals to offset their greenhouse-gas emissions and reduce their environmental impact, a voluntary carbon market can help reduce emissions and stimulate the development of low-carbon technologies.
However, it is important to ensure that purchased carbon credits are generated through legitimate emissions-reduction projects and that the market operates in a transparent and accountable manner. With continued effort and investment, a voluntary carbon market can play a major role in the global effort to combat climate change and create a more sustainable future.
* A version of this article appears in print in the 7 September, 2023 edition of Al-Ahram Weekly