Carbon Trading
Artwork by Jennifer Huang on Insta @_hf_art
By: Madison Corliss
The Inside Scoop On How Carbon Markets
function
Following the release of carbon dioxide, carbon emissions are released into the earth’s atmosphere, causing damage to ecosystems, relating to anthropogenic activities that consist of deforestation, electricity consumption, and industrial manufacturing. Now a persisting question has risen through many conversations around the world on this critical issue: Is there a way to offset such a dramatic change to the environment? The answer is yes!
Coming in hot, carbon markets turn emission reductions and removals into tradable assets. Solar farms or conserving energy products are an example. After gaining these new credits, they are then sold to major buyers who are looking for cost-effective ways to cut emissions or meet a target. To take action towards fixing our environment, the United Nations created The Paris Agreement, which was a legally binding international contract that set out a global framework to tackle climate change.
According to Article 6 of The Paris Agreement that relates to the carbon markets, it “allows countries to voluntarily cooperate with each other to achieve emission reduction targets set out in their NDCs.” In turn, they have the ability to transfer carbon credits achieved through the reduction of GHG emissions (worldbank.org). Creating a bill that simply allows countries to “voluntarily cooperate” with each other, such consumers are pushed to reduce their carbon footprint and reach emission reduction targets in their NDCs.
The Two Types Of Carbon Markets
The carbon market encompasses two types: regulatory compliance and voluntary markets. Now, the regulatory compliance market is one for carbon offsets. In a Cap- and - Trade emissions reductions market, actors buy and sell carbon offsets to comply with the cap or limit imposed on their emissions. Three Kyoto Protocol mechanisms are examples for the regulatory market: Clean Development Mechanism, Joint Implementation, and the EU Trading System. Such mechanisms were put in place to help reduce carbon emissions and have been proven to be successful in the market.
The latter form of the carbon market is the voluntary market which allows carbon emitters to offset their unavoidable emissions by purchasing carbon credits emitted by projects targeted at removing or reducing greenhouse gasses from the atmosphere. Having the ability to be accessed by more sectors of the economy, voluntary markets are considered to be the more flexible carbon credit source, compared to its counterpart. “Companies can participate in the voluntary carbon market either individually or as part of an industry-wide scheme; such as the Carbon offsetting and Reduction Scheme for International Aviation, which was set up by the aviation sector to offset its greenhouse gas emissions.” By doing so, they pledged to counterbalance all CO2 emissions they manufacture above a baseline 2019 level.
Five Main Players Of The Carbon Market
For this market to succeed, there must be structural integrity to support it. Key players entail the cooperation of five groups: project developers, end buyers, retail traders, brokers, and standards.
Project developers help construct projects and supply carbon credits which can range from large-scale, industrial style projects like a high volume manufacturing plant, to smaller community- based ones like clean cookstoves. Certain projects are targeted to either terminate or control direct emissions; having done that, project developers help eliminate GHGs from the atmosphere through the United Nations’ sustainable development goals. Then comes the end buyers who are dedicated to offset part or all of their GHG emissions. Major companies that were considered as end buyers were Apple, Google, airlines and oil and gas companies.
Furthermore, retail traders are also a fundamental part of the sustainability of this market. They buy a great volume of credits right from the supplier, then bundle those credits to its portfolios fluctuating from hundreds to thousands of identical tons of CO2, and vends those bundles to the end buyers usually with some commission. Brokers will then purchase these carbon credits from a retailer trader and sell them to end buyers typically with some commission. Lastly, standards consist of organizations, typically NGOs, that are certain that they will complete a particular project stated by its volume of emissions. What differs standards from your typical consumer is that they have a series of methodologies, or requirements, for each type of carbon project. These requirements are always meant to be followed: projects must comply with all legal requirements of its jurisdiction and should provide additional co-benefits in line with the UN's SDGs.