Carbon markets are an easy method for countries to mobilize resources to decarbonize. Changing processes on such a large scale would normally need a lot of time to fully implement, but the pressure of fast-moving climate change does not allow us the luxury of time. Hence, novel solutions were discussed among COP28, a governmental alliance committed to fighting climate change. Many developing countries, and even some developed countries do not have or will not allocated financial resources to reform their country. (Whether countries are investing their money correctly or not is a topic for another article). Other countries simply lack motivation or have little influence on emitters. Carbon markets fix both problems, as they are on one hand an incentive to get involved in decarbonization, on the other hand they create financial resources to get active on a larger scale.
Carbon markets are the basis for a carbon trading system. One carbon credit allows for a certain amount of CO2 emissions to be emitted by an entity. Gradually, the number of credits will be lowered. Carbon markets are controlled by governments. The main idea is that wealthy countries buy credits from poorer countries. This way, countries with financial deficiencies gain money to drive their own decarbonization while over time wealthier countries are incentivized too, as they will cut emissions costs by buying less credits.
Increasing numbers of countries are implementing their own carbon markets, reacting to the serious threat caused by climate change. The EU has one of the biggest trading systems, but with lots of smaller markets, there was long no possibility to trade emissions internationally. In 2021, the basis for a common trading system was established. This also includes a fund in which 5% of overall profits are directed to support developing countries in their decarbonization strategy. In 2021, even China entered the carbon market terrain, including companies that represent 40% of China’s overall emissions.
There are some criticisms already. Before implementing credits as an equivalent to a certain amount of CO2, we need to measure the emissions of entities/companies clearly. Right now, rules on CO2 measurement and disclosure are inconsistent and do not go far enough, meaning the carbon credits could easily lose their value. At Tracks we have always emphasized the importance of measuring first, in order to effectively manage emissions. Global discussions regarding how much responsibility organizations have for their emissions up- and downstream are still ongoing. Often there is little or no overview to the extent to which entities produce emissions in their global value chains. Thus, carbon markets might not represent the reality.
Incentivizing is often necessary to nudge companies to change the way they act, and there is probably no better way at the moment than to offer potential cost-savings. The big question remains, will carbon markets drive decarbonization, or will other strategies like carbon taxes be more beneficial for global net-zero targets? We will keep an eye on developments and post updates here and on our LinkedIn page.