The Carbon Market came to exist on the back of the Kyoto Protocol. The Kyoto Protocol was the original international agreement aimed at implementing guidelines for reducing global GHG emissions. It was adopted in 1997, came to be enforced in 2005 and applied to the “commitment period” of 2008-2012. The developed countries of the world had base national emissions rates determined. Most set the base year to 1990, and then all future emissions targets would be based on the set rate. These numbers would hence set a cap on carbon emissions, unique for each participating nation, and for businesses the government applies a cap to a whole industry. The cap reduces over time in alignment with the increasingly ambitious emissions goals. The government issues permits to the emitters, which are Carbon Credits. If a nation or business emits less than their permitted allocation, the non-emitted amount of GHGs can be traded, sold or kept for future use. If traded or sold they are part of the cap-and-trade system
To demonstrate the success of this marketplace, the European Union's Emissions Trading System, which initially regulated about 50% of emissions primarily from energy providers and large industrial polluters, saved more than 1 billion tons of CO2e from 2008-2016. In the United States, California is enjoying a 13% drop in CO2e due to a combination of cap-and-trade and strong policy.
So how does it work?
Company A has a cap of 100 units (100 x 1 ton), but they will exceed this and hit 120 units. If they do, they will be fined and taxed heavily. Company B on the other hand, which also has a cap of 100 units, can quickly deploy tech to reduce their emissions to 80 units. Company A can then buy Company B’s unnecessary credits – so long as the cost is less than the would-be fine, this makes sense for both parties. Regardless of who they pay for credits obviously they’d prefer not to have to do this, so there is continued incentive for Company A to address their emissions. Of course this is a simplified explanation – as with all things climate, the devil is in the detail, and the real-world application of carbon trading is far more complex.
Another option for accessing carbon credits in a trade situation is that Company A approaches a forested land owner who was possibly interested in a deforestation and animal agricultural project. If Company A can pay them on a perpetual basis (while they deploy emissions reductions tech), it’s in the best interest of both parties to leave the land healthily growing carbon capturing forest.
Buying carbon credits is mandatory in the case where a company will exceed their carbon cap. And that’s the difference between credits and offsets – the latter being voluntary. A carbon-reduction project generates carbon credits, and someone then buys it to offset their own emissions from air travel or just from their general lifestyle. As they gain popularity they are popping up all over the place. Demand equals supply. While that’s good in theory, people wishing to buy offsets need to carry out fairly extensive research to know that these projects are what they say they say. Carbon credit projects need to demonstrate that the achieved emission reductions or carbon dioxide removals are real, measurable, permanent, additional, independently verified, and unique. We recommend looking to Gold Standard, Verra, or Green-e Climate for certification of projects you’d like to use to offset your carbon emissions, and we’ll link to those below.
The carbon market has the potential to continue to increase the speed with which we embrace renewable energies. And it has been shown to incentivize emissions reductions. But we feel strongly that this system should be temporary. The main goal should be to reduce emissions in an absolute sense, not just through trading.
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