7. Affordable and clean energy
12. Responsible consumption and production
Emissions trading schemes, also known as emissions allowances, are regulated markets where involved parties (usually businesses) transact certificates that allow the owner of that certificate to pollute (an externality of their business activity).
The issuance of these certificates is controlled by the regulating entity so that scarcity is intact - a key element of the scheme. The ultimate goal is to create an economic incentive for businesses to reduce their carbon footprint by having them buy pollution allowances from the regulating entity or the open market.
Businesses can exchange and transact these allowances with each other whenever facing surpluses or shortages – i.e. whenever a company is polluting less than the number of allowances received or bought, it can sell those allowances to companies in a polluting allowance deficit.
Voluntary carbon markets are a completely different system than regulated emissions trading schemes – we're going from foosball (2 to 4 people playing) to American football (close to 100 people playing). (Diego's note: Manuel is still new to the fun analogy game… give the kid some time, we just got him to take off his Patagonia vest a few weeks ago).
Obviously, with voluntary markets, businesses are not obliged to participate, but some do in order to balance their polluting profile.
For context, regulated trading schemes cover a larger amount of carbon emissions with fewer parties involved when compared to the voluntary carbon markets. In 2020, the EU ETS issued over 1,300 allowances of 1mt of CO2 each (for a total of 1.3 billion tonnes). The newly created Chinese ETS is worth 4 billion tonnes. In the same year, the voluntary carbon market issued over 220 million high-quality carbon credits of 1t of CO2 each.
This means that:
ETSs are also a larger market given their ties with financial markets (i.e. the EU ETS scheme has a regulated exchange market) which amplifies liquidity. Exchanges facilitate emission allowances transferability, which is then reflected in trading volumes.
Carbon offsets, of all types, are simply highly bespoke efforts to create and bundle ‘negative’ greenhouse gas emissions. Offsets are projects designed to counter polluting activities, either through process improvements, energy efficiency gains, or disruptive technologies. These projects are often run by NGOs that depend on these credits (which they sell in the open market) and other forms of funding as subsidies or are run by for-profit institutions which use these credits as bonuses or subsidies.
For the most part, offsets can be grouped into two categories:
Both of these offsets are extremely important to address the climate problem – avoidance credits ensure the existence of more emission-efficient businesses going forward, while removal credits increase the Earth’s sequestration capabilities (beyond our natural wild forests and gardens).
That said, larger problems begin to take place when institutions and individuals use these offsetting mechanisms as their sole solution to climate change. Instead of focusing on implementing carbon reduction efforts within their businesses, there is now a lazier resource at hand – a market offering the “same” carbon accounting outcome at a fraction of the cost of implementing those changes.
Consider the following:
Quality assessment within the voluntary carbon markets still suffers from a meaningful subjective effort. Location (i.e. how close to the polluting entity), carbon sequestration permanence (i.e. for how long a credit guarantees carbon sequestration), the expertise of the developer, amongst others, are all important factors when assessing credit quality. This means procurement consultants are still essential to certify the quality of the underlying credits.
Whilst there is a lot of trading of emissions credits, we need not forget the real goal of all this – are we actually reducing emissions?
Three things are happening as we speak:
A few interesting notes from the Trove Research analytics portal on carbon offsetting:
With the current setup, we're essentially allowing businesses to transfer pollution capacity over time. We believe we need to be more honest with ourselves and the market, and stop pretending we're curtailing overall pollution when all we're really doing is delaying it, a little. There are large amounts of credit allowances from past years being used to offset pollution today, and today's allowances are providing for more pollution in the future... we can, and need to do better than this.
This article was originally puplished on The Lykeion. You can subscribe to their newsletter here.
We all have a role to play
With just ten years to go, an ambitious global effort is underway to deliver the 2030 promise. We want to take a stand and we are calling on our community to showcase how they are contributing to the 17 Sustainable Development Goals, whilst influencing more and more people to unravel their role to play.
Here, you will find four different ways your ideas can flourish, dialogue can be enhanced, and action can take place. You can choose one or all four, and Nova SBE will be there to support you all the way and guarantee tangible change.
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