The carbon market is a trading system of carbon credits that allows states, companies, and individuals to buy and sell carbon credits.
Whereas a carbon credit is a fixed amount of carbon emissions that a country or organisation should not surpass, it can be traded if the full allowance is not used or exceeds the limit. The cap-and-trade mechanism sets a limit on carbon emissions and allows states, companies, and individuals to sell their extra carbon credits and buy carbon credits if they exceed the set limit.
There are two types of carbon markets — compliance and voluntary. The Compliance Carbon Markets (CCM) are binding and regulated by some regime or legal instrument placing obligations on nations, companies and individuals to buy and sell carbon credits to reduce carbon emissions – for example: the Paris Agreement, EU Emission Trading System, and Clean Development Mechanism — are important examples of International Compliance Carbon Markets. Voluntary Carbon Markets (VCM) perform on a volunteer basis to buy and sell carbon credits.
Many companies buy carbon credits from projects like reforestation, renewable energy etc. The carbon market is a growing area as there is greater realization to fight climate change and protect our planet from its disasters. The Taskforce on Scaling Voluntary Carbon Markets estimates that the market for carbon credits could be worth upward of $50 billion as soon as 2030.
There are several advantages of carbon markets. First, they have become an important mechanism to fight climate change. Climate change disasters are hitting countries across the globe in the form of floods, droughts, forest fires, droughts and heat waves. Due to these disasters, humanity is facing socio-economic loss in areas like agriculture, health, education, and gender equality etc. So, these carbon markets are playing an important role in mitigating and adapting to climate change.
Second, carbon markets are a new and innovative source of economic benefits, especially for developing countries. Rich and developed nations buy carbon credits from developing and underdeveloped nations and utilize them for their industrial growth.
Carbon markets have provided alternative means to industries that were under threat of closing due to their carbon emissions to keep running their businesses. The introduction of new areas of financial investments in carbon markets has also opened up new employment opportunities. The economic benefits gained from carbon markets help nations to spend on socio-economic development and carbon credits bought by rich nations are being used to boost their industrial growth. So, it creates a win-win situation for rich and developing nations both.
Third, states have set their targets to cut carbon emissions with timelines in their Nationally Determined Contributions (NDCs). Carbon markets in addition to financial benefits are helping the nations to fulfil their commitments to reach their net zero targets submitted in their Nationally Determined Contributions (NDC).
There are many challenges for carbon markets across the globe. First of all, the credibility of carbon markets to reduce carbon emissions is under question. Rich nations buy carbon credits and use them thus producing the same level of carbon emissions. So, carbon emission remains in the same quantity in the atmosphere rather than any actual decrease in emission.
Second, the boosting of the economic growth of developing countries is also a myth. Every year developing countries face most of the climate-led disasters. So, any economic benefits gained from carbon markets are spent on recovery and rehabilitation efforts. In real terms, the countries most affected by climate-led disasters do not have any economic benefits through these carbon markets.
Third, the issue of human rights is also a challenge for carbon markets. The profits gained from carbon markets are not spent on indigenous communities or the people most affected by climate-led disasters. As a result of this indigenous communities or people affected by climate-led disasters remain deprived of their rights to get their share from these markets.
Fourth, the future of carbon markets is still unpredictable. Many developing countries do not have technical and financial support mechanisms to establish sound carbon markets and reap their benefits. They do not have experts to quantify the exact amount of carbon emissions and establish a sustainable mechanism of carbon trade.
Moreover, companies running the businesses of carbon fuels are opponents of climate change awareness and adversaries to any initiates to reduce carbon emissions to safeguard their economic interests. Many developing and under-developed countries are witnessing issues of corruption and political instability that lead to a lack of interest within foreign companies to indulge in carbon markets of such countries.
Fifth, many countries are naturally blessed with a huge forest cover that gives them an advantage over other countries to acquire benefits in carbon trade.
Carbon markets are an important economic area to invest in since they can help fight climate change, gain economic benefits, and generate new employment opportunities. On the other hand, challenges like credibility, lack of expertise, real long-term impacts on climate change are still to be resolved.
The writer is a graduate of University of Oxford in Public Policy. She tweets/posts @zilehumma_1