Carbon emission trading
Carbon emission trading (also called carbon market, emission trading scheme (ETS) or cap and trade) is a type of emissions trading scheme designed for carbon dioxide (CO2) and other greenhouse gases (GHGs). It is a form of carbon pricing. Its purpose is to limit climate change by creating a market with limited allowances for emissions. This can reduce the competitiveness of fossil fuels, and instead accelerate investments into renewable energy, such as wind power and solar power. Fossil fuels are the main driver for climate change. They account for 89% of all CO2 emissions and 68% of all GHG emissions.[1]: 12
"Carbon market" redirects here. For the market in Cebu City, Philippines, see Carbon Market.
Emissions trading sets a quantitative total limit on the emissions produced by all participating emitters. As a result, the price automatically adjusts to this target. This is the main advantage compared to a fixed carbon tax. Under emission trading, a polluter having more emissions than their quota has to purchase the right to emit more. The entity having fewer emissions sells the right to emit carbon to other entities. As a result, the most cost-effective carbon reduction methods would be exploited first. Carbon emissions trading and carbon taxes are a common method for countries in their attempts to meet their pledges under the Paris Agreement.
Carbon emissions trading schemes are in operation in China, the European Union, and other countries.[2] However, they are usually not harmonized with any defined carbon budgets, which are required to maintain global warming below the critical thresholds of 1.5 °C or "well below" 2 °C. The existing schemes only cover a limited scope of emissions. The EU-ETS focuses on industry and large power generation, leaving the introduction of additional schemes for transport and private consumption to the member states. Though units are counted in tonnes of carbon dioxide equivalent, other potent GHGs such as methane (CH4) or nitrous oxide (N2O) from agriculture are usually not part these schemes yet. Apart from that, an oversupply leads to low prices of allowances with almost no effect on fossil fuel combustion.[3] In September 2021, emission trade allowances (ETAs) covered a wide price range from €7/tCO2 in China's new national carbon market[4] to €63/tCO2 in the EU-ETS.[5] Latest models of the social cost of carbon calculate a damage of more than $3000 per ton CO2 as a result of economy feedbacks and falling global GDP growth rates, while policy recommendations range from about $50 to $200.[6]
Business reaction[edit]
The International Air Transport Association, whose 230 member airlines comprise 93% of all international traffic, position is that trading should be based on "benchmarking", setting emissions levels based on industry averages, rather than "grandfathering", which would use individual companies' previous emissions levels to set their future permit allowances. They argue grandfathering "would penalise airlines that took early action to modernise their fleets, while a benchmarking approach, if designed properly, would reward more efficient operations".[42]
In 2021 shipowners said they are against being included in the EU ETS.[43]
The process began in Rio de Janeiro in 1992, when 160 countries agreed the UN Framework Convention on Climate Change (UNFCCC). The necessary detail was left to be settled by the UN Conference of Parties (COP).
In 1997, the Kyoto Protocol was the first major agreement to reduce greenhouse gases. 38 developed countries (Annex 1 countries) committed themselves to targets and timetables.[71] The resulting inflexible limitations on GHG growth could entail substantial costs if countries have to solely rely on their own domestic measures.[72]
The following is the estimated size of the worldwide carbon market according to the World Bank:[73][74]
Volume (millions metric tonnes, MtCO2)
Global carbon market[edit]
A global (international) carbon market can play a significant role in stopping climate change. The Paris Agreement provided a legal base for its creation.[132] In the beginning of 2024 the idea made some progress, as in the Bonn meeting new tools and supervisory bodies was created. One of the purposes is to address human rights issues during the implementation of the mechanism. To establish such market, capacity building measures in participating countries are needed. Those measures are advancing "with the number of designated national authorities rising to 72 on 1 March from 64 on 2 November."[133]
The rules of the European Union Emissions Trading System include the possibility of connecting it with other trading systems. This had already happened with the Switzerland emissions trading system.[132][134] China expressed a support for a global carbon market, saying it is better than the Carbon Border Adjustment Mechanism of the European Union.[135]
In 2023 the global value of carbon markets was $948.75 billion.[136] It is expected to reach 2.68 trillion dollars by 2028 [137] and 22 trillion by 2050.[138]
Society and culture[edit]
Public opinion[edit]
In the United States, most polling shows large support for emissions trading (often referred to as cap-and-trade). This majority support can be seen in polls conducted by The Washington Post/ABC News,[139] Zogby International[140] and Yale University.[141] According to PolitiFact, it is a misconception that emissions trading is unpopular in the United States because of earlier polls from Zogby International and Rasmussen which misleadingly include "new taxes" in the questions (taxes are not part of emissions trading) or high energy cost estimates.[142]