Carbon Markets

- Overview

Putting a price on carbon, primarily through "cap-and-trade systems", creates economic incentives for innovation and emission reductions by making polluters pay for their emissions, using tradable allowances within a set cap to control pollution levels and drive cost-effective climate action, with major global efforts expanding, like in China and the US, complementing Europe's established system. 

While cap-and-trade offers emissions certainty, carbon taxes offer cost certainty, and both aim to internalize the cost of carbon, though debates continue on effectiveness and implementation, with some arguing for complementary policies beyond pure carbon pricing. 

1. How Cap-and-Trade Works: 

• Cap: A total limit (cap) is set on total emissions for regulated entities.
• Allowances: Permits (allowances) are distributed, each allowing one ton of CO2 equivalent emissions.
• Trade: Companies that reduce emissions below their allowance holdings can sell surplus allowances to those who need more, creating a market price for carbon.

2. Key Benefits & Goals:

• Cost-Effectiveness: Encourages the cheapest emission reductions first, optimizing climate action.
• Innovation: Incentivizes investment in low-carbon technologies.
• Emissions Certainty: Provides a firm cap, ensuring environmental goals are met, unlike a carbon tax which leaves emissions uncertain.

3. Global Landscape:

• Europe: Has a mature Emissions Trading System (EU ETS).
• China: Launched its national carbon market in 2021.
• US: Efforts are underway for comprehensive strategies, with regional systems in place.

4. Alternatives & Considerations: 

• Carbon Tax: Sets a price on carbon but results in uncertain emissions levels.
• Debate: Some experts argue carbon pricing alone isn't enough and needs to be combined with other policies, noting potential for market manipulation or insufficient transformation.

Please refer to the following for more information:

• Wikipedia: Carbon Market

- Carbon Trading

Carbon trading is a market-based system where governments set emission limits (caps) for industries, allowing companies to buy and sell emission credits (permits) to meet regulatory requirements, encouraging cost-effective emission reductions by creating financial incentives to lower pollution, with major systems like the EU's Emissions Trading System and China's national program driving global efforts to mitigate climate change by putting a price on carbon. 

1. How it Works (Cap-and-Trade):

• Cap Setting: A government sets a total limit (cap) on greenhouse gas emissions for a specific sector, as seen in the EU and California systems.
• Allowance Distribution: Companies receive allowances (permits) to emit a specific amount of CO2, often based on historical emissions.
• Trading: Companies that reduce emissions below their allowance can sell surplus credits to those who exceed their limit and need to buy more.
• Market Dynamics: Supply and demand set the price of carbon, incentivizing innovation and cleaner technologies.

2. Key Examples & Mechanisms:

• EU Emissions Trading System (EU ETS): The world's first major carbon market, considered a benchmark for cap-and-trade.
• Kyoto Protocol: Established the first international mechanism, allowing developed nations to buy emission reduction credits from developing nations (e.g., for solar projects or reforestation).
• China's National Program: Launched in 2021, it's the world's largest carbon market, initially covering the power sector to help China reach carbon neutrality by 2060.

3. Goals & Impacts:

• Reduces Emissions: Provides economic motivation for companies to find the cheapest ways to cut pollution.
• Drives Innovation: Encourages investment in cleaner technologies and sustainable practices.
• Funds Projects: Directs money towards emission reduction and removal projects, like renewable energy or afforestation.

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- The Article 6 for Carbon Markets

In November 2021 at COP26 in Glasgow, nearly 200 countries finalized the "rulebook" for Article 6 of the Paris Agreement, which governs international carbon markets. 

This agreement established the framework for countries to trade emission reductions - known as Internationally Transferred Mitigation Outcomes (ITMOs) - to help meet their climate targets (NDCs). 

1. Key Components of Article 6: 

• Article 6.2 (Bilateral Trading): Allows countries to trade ITMOs directly through bilateral or multilateral agreements.
• Article 6.4 (UN-Supervised Mechanism): Creates a centralized global carbon market, often called the Paris Agreement Crediting Mechanism (PACM), overseen by a UN Supervisory Body to replace the Kyoto Protocol's Clean Development Mechanism (CDM).
• Article 6.8 (Non-Market Approaches): Facilitates international cooperation through finance, technology transfer, and capacity building without the trading of carbon credits.

2. Critical Rules and Standards:

• Avoiding Double-Counting: To ensure environmental integrity, the rules require "corresponding adjustments". This means when one country sells a credit, it must adjust its own emissions inventory so the reduction is only counted by the buyer.
• Legacy Credits: A compromise was reached to limit "zombie credits" from the old CDM system. Only credits from projects registered after January 1, 2013, can be transitioned into the new market for a country’s first NDC cycle.
• Funding for Adaptation: For trades under Article 6.4, a 5% "share of proceeds" is mandated to be transferred to the Global Adaptation Fund to help developing nations build climate resilience.
• Overall Mitigation: Under Article 6.4, 2% of issued credits are automatically cancelled to ensure the market leads to a net reduction in global emissions rather than just offsetting them.

3. Recent Updates: 

While the foundational rules were set at COP26, further technical standards were finalized at COP29 in 2024. 

These updates included streamlined processes for authorizing credits and the approval of methodological guidelines for the centralized market mechanism, moving the system closer to full operational status in 2025 - 2026.

- Carbon Neutrality

Carbon neutrality means balancing carbon dioxide (CO2) emissions by reducing them and offsetting the rest, achieving a net-zero effect, often through natural sinks (forests, oceans) or carbon credits, though it differs from true "zero emissions" (no release) and is more specific than broader "climate neutrality" (all GHGs). 

To reach it, companies cut emissions via renewables/efficiency and compensate for unavoidable ones through offsets like tree planting or buying credits, aiming to stop the atmospheric increase that drives global warming. 

1. Core Concept:

• Balance: The total CO2 released equals the total CO2 removed from the atmosphere.
• Pathways: Reduce emissions significantly (towards net-zero) and/or offset remaining emissions.

2. Key Terms Explained:

• Carbon Neutral: Net-zero CO2 emissions by balancing releases with removals (offsets).
• Climate Neutral: Broader than carbon neutral; balances all greenhouse gases (GHGs) and other environmental impacts.
• Net-Zero Emissions: Balances all GHGs released with all GHGs removed, often used interchangeably with carbon neutrality but can be broader.
• Climate Positive/Carbon Negative: Goes beyond net-zero to actively remove more carbon than emitted, creating a net benefit.

3. How It's Achieved:

• Reduce Emissions: Use renewable energy (solar, wind), improve energy efficiency, switch to low-carbon fuels, electrify transport.
• Offset Emissions: Plant trees, restore wetlands, capture methane, or purchase carbon credits to fund emission reduction elsewhere.

4. Why It Matters:

• Helps combat climate change by halting the rise of atmospheric CO2.
• Promotes sustainable development, green jobs, and corporate responsibility.

- Carbon Footprints

A carbon footprint measures total greenhouse gas (GHG) emissions from an individual, activity, or product, expressed as carbon dioxide equivalent (𝐶𝑂2e), covering emissions from fossil fuels, land use, and consumption. Calculated by considering direct and indirect sources (like energy, transport, food) and converting gases like methane to 𝐶𝑂2 equivalents using Global Warming Potential (GWP), footprints help assess climate impact, with U.S. per capita footprints significantly higher than the global average, necessitating reductions through lifestyle changes. 

1. What it is: 

• Definition: The total amount of greenhouse gases (like 𝐶𝑂2, methane, nitrous oxide) generated by our actions, expressed in 𝐶𝑂2𝑒.
• Scope: Applies to individuals, events, organizations, products, and services.
• Sources: Includes direct emissions (burning fuel in cars) and indirect emissions (electricity use, supply chains).

2. How it's calculated: 

• Data Collection: Gathers data on energy use, transportation, waste, and consumption.
• Conversion: Uses conversion factors (GWP) to standardize different GHGs into a single 𝐶𝑂2𝑒 unit.
• Scopes: Categorized into Scope 1 (direct), Scope 2 (purchased energy), and Scope 3 (indirect, e.g., supply chain) for businesses.

3. Why it matters: 

• Climate Change: Helps quantify our contribution to global warming.
• Comparison: Reveals disparities, with U.S. footprints being among the world's highest (around 16 tons/person) compared to a global average of roughly 4-5 tons/person (2014 figures).
• Actionable Insights: Identifies areas for reduction, such as flying less, consuming less meat, and improving energy efficiency.