What’s green about carbon credit trading?

Unlike the 1997 United Nations’ Kyoto Protocol Agreement, the 2015 Paris Climate Accord commits all signatories, not just the most developed economies, to impose carbon emissions targets. 

This international treaty on climate was adopted by 196 countries with the goal to limit global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels. 

Governments across the world are trying to achieve these carbon targets through taxation, through placing limits on companies emitting greenhouse gases or through facilitating the creation of tradable markets in carbon allowances, also referred to as carbon permits, offsets or credits. 

If implemented successfully, analysts believe that international emissions trading could cut global emissions by around 60%–80% by 2035. However, this method leaves many with mixed feelings on its true environmental impact.

Unpacking carbon trading

Carbon allowances exist when a government sets a cap on the amount of carbon dioxide (CO₂) that can be emitted by an industry. It splits the cap into permits and either gives or sells these permits to firms. If a company doesn’t use its entire allowance, it can sell what it does not need. If it needs more, it can buy permits from those companies with spares. 

This system is referred to as “cap-and-trade”. All cap-and-trade systems have emissions limits compatible with the government’s target of limiting environmental damage. Each year the compliance cap gets stricter, and the shrinking pool of permits gets more expensive. 

There are two broad types of carbon credits traded — voluntary credits and mandatory (compliance) credits. The voluntary market offers individuals, companies or governments who choose to mitigate their own carbon footprint, the ability to purchase carbon offsets from sources outside the compliance market. 

For example, by buying carbon credits on the back of reforestation projects, such as planting trees to absorb CO₂ from the atmosphere. Voluntary carbon credit trades are currently mostly done through relatively unregulated, bilateral negotiations. 

Project details and certified credits are lodged at registries run by crediting programmes, such as Washington-based Verra and Switzerland-based Gold Standard.

Mandatory (compliance) markets are created and regulated by compulsory national, regional,or international carbon reduction regimes. Carbon trading is a legally binding scheme that caps total carbon emissions and allows organisations to trade their allocation on a market. 

For example, in the EU system, which is mandatory for the companies that are covered, they buy the allowances either on the auction or secondary market. At the end of the year, these allowances are surrendered to the European Commission. 

The money raised from the system is spent, for example, on investments that promote cleaner energy uses to, hopefully, reduce the EU’s carbon footprint further. The money raised also goes into social redistribution funds, for example, to disadvantaged, poorer households carrying additional costs of energy as a result of the emissions trading system. 

Funding the gap

Though carbon markets sound great in theory, in practice they are not. The first international carbon market was set up under the 1997 Kyoto Protocol on climate change. However, following widespread reports of abuse, the market collapsed. 

Since then, there hasn’t been a consensus on the best way to implement a “cap-and-trade” system globally. The EU’s emission trading system, launched in 2005, is the oldest active carbon market. Other schemes are operating in Canada, Japan, New Zealand, South Korea, Switzerland and the US. 

In 2021, China launched the world’s largest carbon market for its thermal power industry. The sector accounts for 40% of China’s total emissions, equivalent to double the emissions covered by the EU’s carbon market. 

South Africa plans to develop a framework for potential domestic standards that will ensure the generation of carbon credits used as part of the country’s carbon allowance mitigation.

Climate campaigners argue that too much focus on merely redistributing pollution obscures the fundamental need for all countries to transition away from fossil fuels in the near future. 

This transition is a key driver to avoid severe and irreversible damage to the natural environment. Purchasing carbon credits should therefore be like gap funding — capped and contingent on investments made in carbon reduction technologies. 

According to Vijay Vaitheeswaran, The Economist’s global energy and climate innovation editor, there is potential for carbon trading systems to start achieving their original goal of helping to decarbonise the world. This applies especially in the EU, where carbon credit trading is seen less as a greenwashing exercise, but rather as serious as safety regulations. However, this is not yet the case in many other parts of the world. 

Therefore, combined efforts of governments’ commitment to making carbon trading more attractive are urgently required. This can be done through increasing carbon credit prices and penalties, and by establishing globally integrated and regulated carbon markets, thereby setting a solid foundation towards sustainable, global climate behavioural change. 

The views expressed are those of the author and do not necessarily reflect the official policy or position of the Mail & Guardian.