Carbon Trading: A Quest forBalance in a Changing Climate

‘Emission trading mechanism’ was introduced as a means to incentivise the reduction or absorption of greenhouse gases from our atmosphere, especially CO2, under the provisions of the Kyoto Protocol. After almost two decades, the methodology may have reined in an increasing annual emission rate but has not resulted in actual emission cuts. That too, when there are at least 68 functional CPIs (Carbon Pricing Instruments) in 2022, which covers 64 per cent of the global emissions, and the carbon trading market is witnessing exponential growth with each passing year

Carbon has always been, and is still, the most essential element for the existence of life forms on planet Earth. Lack of CO2 would result in the Ice Age, killing almost all living creatures. On the other hand, excess of it will warm the planet beyond our tolerable limits.

The lack of desired success in the emissions trading mechanism highlights the limitation of the carbon trading mechanisms. One of the major factors behind this lethargic success is the stark divide between the developed north and the developing south. Meaning that real culprits of environmental pollution can get away by purchasing carbon credits due to the size of their money bags. The Daily Guardian reports that European countries are the biggest carbon credit buyers. On the other hand, India and China are the two biggest suppliers. Also, the absence of transparency in the accountability framework in allocating carbon credits is another factor that decreases confidence in the carbon trading mechanism.

MONOPOLY OF THE WEST

There is complete dominance of the West (developed countries) in the global carbon trading market, not just in terms of volume but prices too. A report published by Reuters shows that in 2022, the value of traded global CO2 reached €850 billion, in which the share of the European Union-Emission Trading System (EU-ETS) stands at a staggering 87 per cent. Carbon credits worth €751 billion changed hands in EU-ETS in 2022. Similarly, the value of carbon trade in the North American continent was pegged at €60 billion. China’s nascent ETS, based on emission intensity, stood at a meagre €505 million.

The West, primarily Europe and North America, also dominate the emission market in terms of per ton of carbon prices which are highest in EUETS, followed by UK-ETS, as no other region has introduced more stringent emission control plans than them. Due to this, Europe has emerged as the favourite destination for agencies and organisations, generally belonging to developing countries, to sell their hard-earned carbon credits.

In the absence of global standards regarding carbon credit, the prices are in the hands of market forces where the West could use its monopoly to manipulate developing countries, especially when the supply chain of carbon credit diversifies. This is and should be a cause of concern for countries like India, which supplied 17 per cent (278 million carbon credits) of the global carbon credit in the voluntary carbon market between 2010-2022.

PHANTOM CREDITS

The Guardian’s investigation on Verra,a leading carbon credits certifier worth £1.6 billion, found that over 90 per cent of rainforest offset credits certified by them are nothing but “phantom credits”. Major companies like Disney, Shell, and Gucci have been using the credits approved by Verra.

As part of the rainforest carbon offsetting programme, a solution must be devised to protect a portion of the rainforest and prevent it from becoming a barren land. The carbon sequestered from the atmosphere by the protected patch corresponds to credits. After certification, the company could sell these credits to anyone in the carbon market. The investigation highlighted that the company allocated 94.9 million carbon credits under the rainforest carbon offsetting programme. But in reality, 5.5 million credits worth of carbon was sequestered from the environment. The report adds that a staggering 94 per cent of the credits generated had no positive impact on the climate. Similarly, the University of Cambridge pointed out that threats to the forests have been overstated by 400 per cent.

NO REDUCTION IN EMISSION

Earlier, it was mentioned that the total value of the global carbon market is increasing exponentially. As per the data of Refinitiv, value of the world carbon market has increased from €186 billion in 2018 to €240 billion in 2019. The carbon market touched the €288 billion mark in 2020, even though it was a COVID year. Later it reached €762 billion in 2021 and €865 billion in 2022.

EU-ETS is one of the oldest and biggest carbon trading markets that started functioning in 2005. However, even after two decades have gone by since the Kyoto Protocol approved emission trading, there isn’t much change in the global emissions pattern. In 2015, a CO2 equivalent of 47.06 Gigatonne (Gt) was added to the environment, which increased to 47.69Gt in 2016, 48.39Gt in 2017, 49.59Gt in 2018 and 49.88Gt in 2019.

If you look at historical emissions, USA is the second largest carbon emitter as of 2022, with a share of 184.10 Gt of total carbon emitted to the atmosphere, following China with a share of 224.5 Gt. EU has been the third largest, with a share of 116.32Gt.

The data shows that this trading mechanism may have helped a few developing and low-income countries to get their hands on some capital to finance their efforts to shift to environment-friendly policies such as enhancing the role of solar and other renewable energy sources. But it hasn’t resulted in any absolute emission cut. Why? Because the countries responsible for most of the historical emissions get away by purchasing carbon credits without cutting their emission.

Thanks to the early arrival of the industrial revolution, the West has accumulated so much wealth that it could continue to function without actually cutting its emissions. This has propelled the demand for carbon credit, especially in the compliance market, leading to skyrocketing prices. Currently, the EU, North America and the United Kingdom (after Brexit) would be some of the best countries to sell carbon credit which results in them monopolising the global carbon market.

Another challenge that emission trading systems face is the accuracy and quality of audits of credit claims made by various organisations. Incidents like Verra question the credibility of the carbon market in the world. Therefore, it is rightly stated, “Transparency and accountability are crucial to maintaining confidence and environmental integrity – a market without trust will never be successful,” Anatomy of Carbon Market.

The West, primarily Europe and North America, also dominate the emission market in terms of per ton of carbon prices which are highest in EU-ETS, followed by UK-ETS, as no other region has introduced more stringent emission control plans than them. Due to this, Europe has emerged as the favourite destination for agencies and organisations, generally belonging to developing countries, to sell their hard-earned carbon credits