A Global Carbon Price Is a Mirage 

Trading in greenhouse gas emission credits is likely to boom but unlikely to lead to a single global market 

On November 29th, a GBP was worth €1.19 4,32. Gold costs $US1815 an ounce. But the price of carbon dioxide, a commodity of greater importance to the fate of the planet, is anybody’s guess. Why? Because countries around the world have not yet agreed on standardizing carbon assets and on creating uniform exchange rules. Without these global markets cannot operate.  

 

COP26 is looking to limit global warming to below 2°C above pre-industrial levels and pursue efforts to limit it to 1.5°C through aggressive greenhouse gas emissions reductions through carbon pricing. Carbon pricing” is a market-based strategy for lowering global warming emissions. Putting a price on carbon helps to incorporate climate risks into the cost of doing business. Emitting carbon becomes more expensive, and consumers and producers seek ways to use technologies and products that generate less of it. This desire for a net-zero world, in which greenhouse gases emitted are canceled out by those removed from the atmosphere, has led to a significant expansion of the global carbon (shorthand for carbon dioxide, CO2) market.   

 

In a carbon market, technologies that reduce the amount of carbon a company (or an individual) produces—their “footprint”— create units of value called carbon offset credits. These credits are generated from emission reduction projects (a solar farm or forest conservation easement, for example) or pollution allowances allocated by government cap-and-trade systems. The credits are then sold to buyers, often a private company or government, looking for cost-effective ways to cut emissions or meet a target. 

 

Carbon markets turn emission reductions and removals into tradeable assets. However, these assets need a system for certifying, registering and trading them. 

 

Furthered by regulation and societal pressure, verified carbon credits have become an emerging investment area for companies and individuals as well as investors who may wish to help solve climate change and achieve long-term returns. However, the carbon market’s growth has been uneven, with notable national variances. The U.S., for example, has no current federal carbon regulation but does have two regional compliance markets. 

 

Carbon markets of varied sizes and flavors already exist around the world, including legally mandated cap-and-trade markets for certain sectors in the US, Europe, and China, and a booming market for voluntary offset credits bought by companies. 

 

Article 6 of the Paris Agreement outlines two types of global carbon markets where certified registered carbon assets can be traded. But both boil down to the sale of credits generated through emissions-reducing projects to buyers looking to fulfill an emissions-reduction target.   

 

The first market consists of trade deals between governments that agree to buy and sell carbon credits (or allow private entities within one to sell credits to the government of the other). The state of California and two Canadian provinces share a linked cap-and-trade market. Japan, South Korea, and Switzerland have all purchased offsets derived from projects in other countries, and then counted those toward their domestic decarbonization targets. Such deals are regulated only by the terms the parties agree to and don’t need to be sanctioned by the United Nations. 

 

The second kind is a true global marketplace regulated by the UN, replacing smaller local or regional carbon markets. In this new market, governments or companies would trade credits via a UN supervisory board that would effectively act as an exchange, evaluating project proposals and then tracking the sale of credits from them. 

 

The first already exists and registered trades totaling Eur229 billion ($272 billion) in 2020; the second, valued by the energy consulting firm Wood Mackenzie to be worth about €20 trillion by 2050 cannot get started until negotiators agree on rules for how it will work. 

 

Until negotiators agree on the rules for a global carbon trading market, we will not be able to answer the question:  What was price of carbon on November 29th? Prices ranged from $1 in Shenzhen to $79 in the EU. 

Author: Maria Belcea

A Global Carbon Price Is a Mirage 

Trading in greenhouse gas emission credits is likely to boom but unlikely to lead to a single global market.

 

On November 29th, a GBP was worth €1.19 4,32. Gold costs $US1815 an ounce. But the price of carbon dioxide, a commodity of greater importance to the fate of the planet, is anybody’s guess. Why? Because countries around the world have not yet agreed on standardizing carbon assets and on creating uniform exchange rules. Without these global markets cannot operate.  

 

COP26 is looking to limit global warming to below 2°C above pre-industrial levels and pursue efforts to limit it to 1.5°C through aggressive greenhouse gas emissions reductions through carbon pricing. Carbon pricing” is a market-based strategy for lowering global warming emissions. Putting a price on carbon helps to incorporate climate risks into the cost of doing business. Emitting carbon becomes more expensive, and consumers and producers seek ways to use technologies and products that generate less of it. This desire for a net-zero world, in which greenhouse gases emitted are canceled out by those removed from the atmosphere, has led to a significant expansion of the global carbon (shorthand for carbon dioxide, CO2) market.   

 

In a carbon market, technologies that reduce the amount of carbon a company (or an individual) produces—their “footprint”— create units of value called carbon offset credits. These credits are generated from emission reduction projects (a solar farm or forest conservation easement, for example) or pollution allowances allocated by government cap-and-trade systems. The credits are then sold to buyers, often a private company or government, looking for cost-effective ways to cut emissions or meet a target. 

 

Carbon markets turn emission reductions and removals into tradeable assets. However, these assets need a system for certifying, registering and trading them. 

 

Furthered by regulation and societal pressure, verified carbon credits have become an emerging investment area for companies and individuals as well as investors who may wish to help solve climate change and achieve long-term returns. However, the carbon market’s growth has been uneven, with notable national variances. The U.S., for example, has no current federal carbon regulation but does have two regional compliance markets. 

 

Carbon markets of varied sizes and flavors already exist around the world, including legally mandated cap-and-trade markets for certain sectors in the US, Europe, and China, and a booming market for voluntary offset credits bought by companies. 

 

Article 6 of the Paris Agreement outlines two types of global carbon markets where certified registered carbon assets can be traded. But both boil down to the sale of credits generated through emissions-reducing projects to buyers looking to fulfill an emissions-reduction target.   

 

The first market consists of trade deals between governments that agree to buy and sell carbon credits (or allow private entities within one to sell credits to the government of the other). The state of California and two Canadian provinces share a linked cap-and-trade market. Japan, South Korea, and Switzerland have all purchased offsets derived from projects in other countries, and then counted those toward their domestic decarbonization targets. Such deals are regulated only by the terms the parties agree to and don’t need to be sanctioned by the United Nations. 

 

The second kind is a true global marketplace regulated by the UN, replacing smaller local or regional carbon markets. In this new market, governments or companies would trade credits via a UN supervisory board that would effectively act as an exchange, evaluating project proposals and then tracking the sale of credits from them. 

 

The first already exists and registered trades totaling Eur229 billion ($272 billion) in 2020; the second, valued by the energy consulting firm Wood Mackenzie to be worth about €20 trillion by 2050 cannot get started until negotiators agree on rules for how it will work. 

 

Until negotiators agree on the rules for a global carbon trading market, we will not be able to answer the question:  What was price of carbon on November 29th? Prices ranged from $1 in Shenzhen to $79 in the EU. 

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