Carbon Markets A Key Tool in the Fight Against Climate Change

Greenhouse gases such as methane, carbon dioxide, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride, and nitrogen trifluoride are required to keep the earth warm at an optimal temperature of 288K (15 degrees Celsius). They are critical in keeping the Earth from freezing. Industrialization and a rapidly rising population have increased greenhouse gas emissions, causing the Earth’s temperature to rise. This contributes to global warming and extreme weather events such as floods, earthquakes, and drought, to name a few.

In efforts to help reduce these emissions, the 1990 US Clean Air Act that introduced a Cap and trade method to reduce sulfur oxide emissions in the atmosphere was mimicked. This was the first cap and trade method that was implemented. It involved buying allowances for the emission of sulfur to the environment.

In 2005, inspired by the US Clean Air Act, the European Union Emissions Trading System (EU ETS) established a carbon market to reduce greenhouse gas emissions. This market peaked in 2015 and is based on carbon trading, a system that encourages industries and countries to reduce emissions by issuing carbon credits and offsets.

Carbon credits, simply put, are permits allowing the owner to emit a certain amount of greenhouse gases, like carbon dioxide or carbon dioxide equivalent. EU ETS uses carbon credits to lower overall emissions. The ETS sets an emissions cap, or limit, for a specific period. This cap is divided among companies as tradable allowances, each representing one tonne of CO2 emissions. By the end of the period, the companies need to demonstrate a balance between the allowance and emissions.

For example, if two companies are each given 200 allowances, and Company X emits 300 tonnes of Carbon dioxide, they would have exceeded their limit. To comply, Company X must buy more allowances or offset credits. Offset credits are earned by investing in projects like tree planting that remove Carbon dioxide from the atmosphere failure to balance emissions results in fines and the need to provide missing allowances.

On the other hand, if Company Y emits only 100 tonnes of CO2 by using renewable energy or adopting eco-friendly practices, they have 100 surplus allowances. These can be banked for future use or sold to companies that have exceeded their limits. The emissions cap gradually decreases each year, forcing industries to adopt renewable energy and reduce their reliance on offsets and purchased allowances.

Carbon credits are therefore calculated by the amount of carbon dioxide emissions reduced or removed from the atmosphere. To make sure they are accurate and credible, these credits must be certified by independent third-party organizations. There are standards to calculate Impacts. The certification involves standards that measure the impact of a project or industry. Some of the key factors in the certification of the credits include; Additionality where a project must demonstrate that the emissions would not have occurred without a carbon credit incentive, Measurability which states that the emission reductions must be quantifiable and verifiable using established methods and permanence which states that the emission reductions must be long-lasting and not easily reversed. Each certified carbon credit represents a unique, verified reduction of one tonne of carbon dioxide equivalent. These credits can then be sold or traded in the carbon market, providing financial incentives for further emissions reduction projects.

To minimize greenhouse gas emissions, the majority of firms have vowed to achieve net zero by 2050. This is a vow not to raise carbon emissions by continuing to produce but to cancel them out with carbon offsets, such as planting trees to absorb the amount of carbon the industry creates. Some businesses frequently have to choose between purchasing allowances and using renewable energy in their production.

While carbon markets have a significant potential for growth, there are several difficulties. Most poor countries may avoid paying the subsidy by manipulating emissions calculations. Environmentalists have contended that planting trees is not a carbon-offsetting approach because trees are already present.

Despite lingering doubts, the carbon market is experiencing continuous growth. With the ambitious target of reducing carbon dioxide levels by 43% by 2030 becoming increasingly challenging, the sale of carbon credits has become a lifeline for many industries, including electric vehicle manufacturers and renewable cooking appliance producers.

This trend offers hope that by 2050, a significant number of industries will have reached their pledged net-zero emissions goals.

References
1. Investopedia. “Carbon Credit.” Investopedia, https://www.investopedia.com/terms/c/carbon_credit.asp. Accessed 27 June 2024.2. Climate Impact Partners. “Carbon Credits Explained: What They Are and How They Work.” Climate Impact Partners, https://www.climateimpact.com/services-projects/carbon-credits-explained-what-they-are-and-how-they-work/. lingering doubts, the carbon market is experiencing continuous growth. With the ambitious target of reducing carbon dioxide levels by 43% by 2030 becoming increasingly challenging, the sale of carbon credits has become a lifeline for many industries, including electric vehicle manufacturers and renewable cooking appliance producers.

Written by Fridah Joy Namudu

Environmental Engineering Scholar || Front-end Developer || UI/UX Designer