The world, as we know it now, has witnessed a gigantic transformation from the discovery of chemicals and gases to the current situation when the same have become a threat to life on the planet. This transformation has resulted in, perhaps the greatest untackled issue of modern life that is, climate change. Climate change highly owes its existence to the uncontrolled massive emissions of greenhouse gases, especially carbon. When more and more quantities of greenhouse gasses are exposed in the environment, a greater amount of heat gets trapped in the planet’s atmosphere. This results in a threatening increase in the world temperature, thus destabilizing the climate. In 2019, 36.81bn tons of carbon was emitted into the atmosphere. China is the world’s largest emitter of greenhouse gases in the current time period. It emits twice as much as the United States of America, which is the second largest emitter of CO2. The United States is followed by India, Indonesia and Russia. India being the third largest producer or carbon, emits 7% of the world’s total emissions.
World leaders realized that carbon was increasingly becoming a hazard to the global environment and was not an issue faced by any one nation. In 1997, the Kyoto Protocol was adopted by countries. The mission aimed at reducing CO2 emissions and other greenhouse gases from the atmosphere. As a result of this protocol, carbon banks or carbon trading systems was introduced. In 2001, 191 countries ratified the protocol. A carbon bank is an individual, non-profit organization aimed at carbon sustainability. To achieve this goal, a carbon bank gives out carbon credits to those businesses, industries and even countries that emit carbon dioxide more than the prescribed amount.
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A carbon credit is a term given to any tradable certificate or instrument that gives a permit or right to the holder to emit carbon. These carbon credits are purchased by institutions who emit more than what is authorized. For example, a business that generates 100,000 tons of greenhouse gas emissions a year. The government passes a law to limit emissions to 80,000 tons. Now the firm can either reduce its carbon emissions or buy carbon credits to offset the excess, from carbon banks legally authorized to sell credits. Thus, a firm has to pay a price in order to produce more than the permitted amount of carbon, like the World Carbon Bank Finance Unit created by the World Bank. One Carbon credit gives a sanction to produce one ton of CO2. According to the Environmental Defense Fund, that is the equivalent of a 2,400-mile drive in terms of carbon dioxide emissions. It can also be said that these credits are like fees or penalties for producing excess amounts of carbon. This mechanism is used by carbon banks to discourage production and thus reduce the carbon release.
Carbon credits are broadly divided into two types: voluntary emissions reduction (VER) (these credits are created by voluntary institutions through scientifically developed programs) and certified emissions reduction (CER) (these credits are mandatory credits tied to verified projects).
The exchange of carbon credits is known as carbon trade. This carbon trade can take place between individuals, firms and even countries. The world’s biggest carbon trading system is the European Union Emissions Trading System (EU ETS).
In order to purchase carbon credits, each credit requires a price value. The system of allocating prices of carbon units is known as carbon pricing. The current price of carbon is $20.81 USD. Market factors of demand and supply play a significant role in the determination of these prices. Moreover, prices are set by mainly by two methods:
- Emissions trading systems (ETS) cap and trade system: This mechanism caps the total amount of carbon emissions and these caps are reduced every year at a rising scale. Firms who do not produce very high amounts of carbon dioxide are permitted to sell the credits they did not use for themselves, to those businesses who emitted large amounts. This is how demand and supply are generated in the Carbon Market.
- Carbon tax: carbon tax is one of the most efficient methods of carbon pricing and reducing carbon emissions. These are directly imposed taxes on the production of carbon. A total of 25 countries worldwide impose taxes on carbon including the EU, Canada, Singapore, Japan, Ukraine, Australia, Sweden, Chile, and Argentina.
Recently, the implementation of emission trading for environment’s benefits has been on the rise at different scales. This arrives with three remarkable merits on specific arenas: environment, economy and public policy. Environmental efficiency related advantages of this policy seem to be irrefutable. Not only does it ensures the transparency of emission reductions targets, but carbon trading also increases the chance of realizing mid to long-term committed ambitions through imposing a cap to ward the approach off pernicious external factors. In addition, economy can take advantage a lot from the adoption of this instrument. With the flexibility in buying and selling allowances, an entity obtains much eagerness in mitigating their emission, as well as golden opportunities to generate greater revenues and attract other financial streams, remarkedly as to small and medium-sized companies/countries. Such incentives are likely to bring the low-carbon industry into sharp focus, thus paving way for the uprising of decarbonization and colossal advancements in technology with less carbon footprints. In terms of society, emissions trading system will probably do wonders for societal well-beings.
The operation of emissions trading has also coincided with many real challenges, however promising such an avenue is. Case in point, the validity of old CDM (the Clean Development Mechanism) credits under the Kyoto Protocol’s market could translate into a surplus of credits, as in many cases they have not yet been issued although companies have managed to limit pollution. The public has come to cast doubt on the actual environmental efficacy of such an ambitious scheme as a result. Additionally, double counting is another hindering factor, when a country that sells carbon credits still declare its emissions reduction after the deal has been signed, which represents the need for a more watertight set of rules to reach a consensus.
Meanwhile, determined efforts will have to be made if nations worldwide are to guarantee the achievement of initial climate targets, as well as restricting aberrant motives that act as a preclusion to raising ambitions. The entitlements of local stakeholders also require meticulous consideration, while at the same time governments should exert themselves to prevent detrimental impacts on the environment and committing to sustainable development objectives.
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