Half of the world agrees carbon markets crucial to tackling climate change: ICAP report

Ilario D'Amato
23 February 2016

LONDON: Now the Paris Agreement has been secured, implementing climate pledges made by the world’s countries is the next step to curbing rising global temperatures and spurring a prosperous, low carbon economy. To achieve that, carbon markets will play a crucial role, a new report by the International Carbon Action Partnership (ICAP) shows.

Before COP21 in Paris, countries submitted their Intended Nationally Determined Contributions (INDCs) detailing how they wanted to reduce their emissions and adapt to climate change. Half of such INDCs supported international carbon markets as a tool to achieving their targets.

“Giving a value to carbon emissions, or more precisely to cutting them, is a straightforward and efficient way of driving investment away from dirty technologies and toward clean ones,” said Mark Kenber, CEO, The Climate Group.

“This explains why hundreds of countries, states and companies already do so in one way or another. It also explains why organizations working with millions of businesses are calling on governments to make carbon pricing a core part of the policy framework for implementing their national climate pledges.”

Cap and trade

Carbon markets – also called ‘cap-and-trade’ or emissions trading systems (ETS) – are an economic mechanism to put a limit, or ‘cap’, on the carbon emissions that every company can produce in a year. To date, the biggest system is the European Union’s mechanism, EU-ETS, which was born more than a decade ago and through which nations have a set amount of free allowances relating to their needs.

In these systems, every firm can ‘trade’ these permits in a central market. If a company needs to emit more pollutants, it can buy allowances from those that haven’t used them at all – because they have been able to reduce emissions. A crucial point of the system is that the total number of permits – reflecting the volume of pollutants every firm can emit in the air – is lowered over time.

In this way, the system incentivizes firms to be far below the required limit. Companies can then not only avoid buying new allowances, but can also sell their own: a win for the economy, and a win for the environment.

Video courtesy of Ontario's Office of the Premier

However, once implemented the system can present some critical issues. The main one is a possible overestimating of the emission cap, which is always a balance between economic, political and environmental concerns.

In fact, if the central authority sets this limit too high, this would be ineffective on tackling climate change – and it would weakens the market system itself, following the demand/offer mechanism. This happened in the EU-ETS system in 2007, when the cost of permits rapidly dropped.

A story of success

But these mechanisms are increasingly gaining traction, the ICAP report states. To date, carbon markets cover 9% of global greenhouse gas emissions, a number that will increase to 16% next year – four times more than 2010 – covering almost half of the world’s GDP. Policymakers are increasingly seeing the potential for this tool, which, if correctly implemented and balanced, can lead to great benefits for both their citizens and businesses.

This is the case for some forward-thinking authorities in North America, which are using carbon markets to drive industry innovation and support a cleaner economy. In fact, just days before the historic Paris Agreement at COP21, the Canadian provinces of Ontario, Quebec and Manitoba – all members of The Climate Group’s States & Regions Allianceannounced they would link their carbon markets.

The move further strengthened the links of the Canadian provinces with the US State of California, another States & Regions Alliance member, to create the largest regional carbon market in North America. This effort shows how sub-national governments can implement effective policies if they came together with bold, forward-thinking solutions.

National carbon markets

Collaboration is also key at the national level. During Climate Week NYC last year, China’s president Xi Jinping used his first State visit in the US to announce a bilateral climate deal with US president Obama. The highlight of such visit was the official launch date of China’s carbon market in 2017 – which will become, once implemented, the biggest in the world.

China already has seven regional carbon market pilots, which have accounted for almost 4 million tons of carbon emission quotas so far, says the National Development and Reform Commission. Such numbers make China’s pilot project the world’s second largest carbon trading market, following the EU-ETS.

The business appetite is also strong, with leading companies around the world calling for a price on carbon in countries they operate in. In an exclusive Climate TV interview, Kristin Skogen Lund, Director-General, Confederation of Norwegian Enterprise, explained that a price on carbon is important “because business logic is basically market based, and if carbon doesn’t cost it is going be difficult to develop low carbon solutions.

“If you have a price on carbon then that strong force in the market dynamics will move toward a faster low carbon society, it is that simple. If you have a price on carbon and you can manage that at the global level you also have this level field of competition, which is also needed for business to succeed.”

by Ilario D'Amato

Facebook icon
Twitter icon
LinkedIn icon
e-mail icon
Google icon