Regulating the emissions of large firms is essential in ensuring their (and our) existence in the long run. But how?
To those not buried in the field of environmental diplomacy, the carbon market and carbon trading (also known as emissions trading or cap and trade schemes) seem strange. How can a market revolve around something that can barely be stored?
Carbon trading is one of the major ways in which the market is used to control emissions and countries or firms can manage their carbon footprint. It goes off a simple premise: every firm has a set amount of emissions they can theoretically release. The firms that emit over that limit can either work to reduce their emissions or (more commonly) buy emissions, either from firms who are under-emitting or from the carbon market at a fixed price.
Setting a price and a limit on carbon makes it a tradable commodity, which means that companies have to either become more efficient with their carbon or dedicate more of their profits by buying it. One of its key appeals is that it makes emissions reduction practices much more profitable since it cuts down on the potential expense of purchasing carbon to fulfil its carbon need. Carbon trading has become so enmeshed in the global economy that there are now 5 carbon trading exchanges around the world. It was also set to be one of the fastest-growing commodities markets in the City of London.
See expanded version and get more information at: https://www.climatechangenews.com/2012/11/21/how-the-un-climate-talks-can-glue-together-a-global-carbon-market/
Carbon trading has, so far, been a successful idea to get firms to take responsibility for their actions. It has spurred one of the most significant climate projects in the world—the European Union Emissions Trading Scheme (EU ETS), which puts an emissions cap on some of the largest emitters, covering just under half of the emissions produced by the EU and the EEA.
However, much like with any market, the COVID-19 crisis and the drop off in economic activity has exacerbated the issues with carbon trading. It is difficult to imagine that with reducing profits, firms would want to continue to prioritise their emissions over profit and comply with these measures. The EU ETS project, while still ongoing, shows one of the biggest problems with carbon emissions in a globalised world—that some countries just don’t want to play ball and threaten to relocate due to significant restrictions. Furthermore, some critics also say that allowing major carbon-intensive companies (like energy firms or airlines) to buy carbon means that they do not invest in actually trying to reduce their emissions since they can afford to continue to emit.
Airline demand, in particular, has sustained the carbon economy due to its high carbon dioxide emissions intensity and has been one of the biggest buyers, particularly in the EU, despite many issues. With flights being stalled for the foreseeable future, the demand has begun to drop, and more pressure has been put on countries to relax their environmental regulations.
Australia, in particular, is one such country that has bent under the pressures of COVID-19 to relax its regulations and weaken its integrities by relaxing emission caps and pushing back start dates, despite the carbon market having a significant share in its regional and rural economy.
Climate change is set to be our biggest hurdle in the next decade, with its impacts exacerbating every aspect of our lives, from our health to our financial systems and we need to take action now to mitigate it. Despite the issues that might come with carbon caps, it is by far the most effective system we have in regulating the emissions that industries produce that can actually have a significant impact. Carbon trading, along with a combination of other measures, has been proven to actually work to steadily reduce emissions. From 2005 to 2013, the EU ETS scheme has cut over 200 million tonnes of emissions from being released and has helped kickstart many firm-wide sustainability projects that actually work.
Unlike in the 2008 financial crisis, which saw a significant drop in carbon prices, the world is significantly more reliant on having a steady carbon market for economic reasons and also to preserve our future. Rolling back policies now, when we have 11 years to stay under the 1.5°C limit can have a devastating impact on every aspect of human life. Particularly after the pandemic, it is likely that emission levels will rapidly increase over a short span further justifying the need for maintaining significant climate action like carbon trading. Now is not the time to roll back, but the time to take this lull in economic activity as a means to push forward.
By Rhea Kamath