By David Okul
Climate change is a major problem in the modern world. It is caused by greenhouse gas emissions; carbon is a major GHG. The atmosphere is one. Therefore, it doesn’t matter where emissions are released or absorbed. The world attempts to address the challenge of climate change by strategies like the Paris Agreement.
Carbon trading is among the common strategy used to tackle climate change.
Carbon markets attempt to address climate change by putting a price on carbon. The currency for carbon trading is a tonne of Carbon dioxide or GHG equivalent (CO2e). A carbon credit refers to either a permit to emit 1 tonne of carbon dioxide equivalent or removal of a carbon dioxide equivalent from the atmosphere.
Article 6 of the Paris Agreement provides a foundation for market-based climate measures approaches. The existing carbon markets can be categorized into two the regulatory compliance and voluntary carbon markets. As such, two types of credits exist including Voluntary emissions reduction (VER) and Certified emissions reduction (CER).
Regulatory Compliance Carbon Markets
As the name suggests, the regulatory compliance markets use the law to account for greenhouse gas emissions. It is regulated by mandatory national, regional, or international carbon management regimes.
In the compliance markets, offsets of a similar program have the same price based on the dynamics of supply and demand. The World Bank tracks the countries or regions that have implemented the compliance programs through the World Carbon Pricing Dashboard.
The following are examples of regulatory compliance carbon markets:
- Kyoto Protocol: Three Kyoto Protocol mechanisms are important for the regulatory markets including clean development mechanism (CDM), Joint Implementation, and EU Trading Systems. According to the CDM website, there are over 7,000 such projects in the world. Unlike CDM, Joint Implementation takes place in a country committed to reducing emissions. Examples of Joint Implementation Projects are listed by UNFCCC.
- The European Union Emissions Trading System: It is the world’s first and biggest carbon market. It works using the cap and trade principle.
- California Emissions Trading System: Launched in 2013 and helped to reduce California GHG by over 5% in 2017. The official website is found here.
- Australia Emissions Trading System: Following the Clean Energy Act in 2011, Australia put a price on carbon emissions. The carbon price was effective until 2013 when the scheme was replaced by Emission Reduction Fund, which was not effective in reducing emissions.
- British Columbia Emissions Trading System:
- The New Zealand Emissions:
- A comprehensive list of all countries with carbon taxes and ETS (by 2015) can be found in this article here:
Voluntary Carbon Markets
As the name suggests, voluntary carbon markets include carbon credits used for voluntary purposes instead of regulations. Typically, corporate social responsibility is a key driver for voluntary carbon markets. There is no centralized voluntary carbon credit market as project developers can directly sell credit to buyers, brokers, or retailers.
The sale is voluntary markets are governed by standards, which create methodologies to define and certify projects. Some common standards used in the market include the following:
- Verified carbon standards (VCS)
- Plan Vivo
- The Gold Standard
- The American Carbon Registry
- Climate Action Reserve
- Verified Carbon Standard Program
Each of the standards uses different methodologies for measuring and verifying emission reductions.
Project developers use the standards to turn ideas into projects. Examples of common projects for voluntary carbon markets include REDD+ projects. Like in CDM, voluntary projects can be categorized into industrial gases, energy efficiency, renewable energy, forestry, methane reduction (from coal, landfill, and livestock), and others.
A food company may want to buy credits from a project that promotes sustainable soil techniques while another company may wish to support projects that support rural community livelihoods. The beauty of the voluntary carbon market is that it allows companies to support their cause.
The price range is variable from 0.3 cents per credit for renewable credits to hundreds of dollars for projects that can lock away carbon for thousands of years (e.g. mineralization projects).
Compliance or voluntary carbon markets
The basic idea of carbon markets and trading is simple, ‘by paying someone else to reduce/absorb greenhouse gasses emission somewhere, the buyer of the offset can compensate for his/her emission’. In practice, there are various complexities, for example in methodologies of accounting for carbon and leakages.
Regardless, existing carbon markets provide an avenue for addressing the pertinent problem of climate change. While the compliance markets provide for ‘assured’ reductions, voluntary markets offer great flexibilities for communities and organizations interested in carbon trading.
David Okul is an environmental management professional with over 10 years experience on donor projects, conservation, forestry, ecotourism, and community-based natural resources management. When not working on environmental projects, I spend my time writing for Silvica on a variety of topics.
