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Our 2023 Guide to Carbon Market

By
Stephanie Safdie
updated on 16 Dec 2022
bitcoin and graphs on computer

Climate change isn’t getting better, and human activity is largely responsible for that – meaning that it is up to mankind to reverse the effects of climate change before it is too late.

However, one major resource continuously gets in the way of making any of these actions substantial enough to reduce the global surface temperature: money.

ball of money in someones hands

Developing countries need exorbitant funds in order to implement the actions necessary for them to do their part in reducing emissions and taking part in the fight against climate change.

Retrieving the funds required to make these becoming-compulsory changes could prove difficult, but many are turning to the premise of the carbon market to solve that issue.

What is the carbon market?

In short, the carbon market is the place where carbon credits are traded – where different companies and organizations can go to sell and buy carbon credits. Carbon credits are tradable requests that represent a specific amount of carbon dioxide that will be removed from the air. One tradable carbon credit equates to a single tonne of carbon dioxide or greenhouse gasses created to be either sequestered or avoided in the future.

Carbon credits can be bought by both individuals and organizations to help them reach net-zero emissions, but the carbon market is more often used in order to “make up” for emissions that an individual or company has already produced. 

One of the most common examples of carbon credits is when people air travel. Electric planes have yet to hit the market, but even sustainable people still love to travel – often resulting in guilt for leaving such a large carbon footprint behind. 

The answer? To purchase some carbon credits as an attempt to compensate for the emissions you’ve already produced – and airlines have made it easy, often offering airline customers to buy their carbon credits directly alongside their airline ticket purchase that measure up exactly to their individual carbon footprint created from the flight.

The carbon credits purchased, or the additional fee the airline ticket holder may opt to pay – is then sent to a worthy project or organization dedicated towards positive, environmental contribution that strives to improve worldwide sustainability and global emissions. Common projects that carbon credits might go to include reforestation projects or organizations dedicated to up-cycling. 

There are two different types of carbon markets –  a carbon market for compliance, and a carbon market for voluntary purposes.

Compliance carbon markets are those created due to new international regulations or legislation passed which requires those organizations to contribute to the carbon market. Voluntary carbon markets are more similar to the airline ticket examples – where individuals and businesses can purchase and sell carbon markets on their own account.

In short, compliance carbon markets are for legal environmental purposes, whereas the demand for voluntary carbon markets come from those wishing to reduce their carbon footprint.

Ultimately, the carbon market and carbon credits allow individuals and businesses to carry out their usual personal and business activities without feeling guilty for contributing to global emissions and hindering the fight against climate change.

If the carbon market and carbon credits don’t directly reduce carbon emissions themselves, and serve as more along the lines as a method of compensation – then how could the carbon market help in the fight against climate change?

How can the carbon market help to reduce emissions?

The new discussion on how the carbon market could help to reduce emissions are derived from Article 6 in the Paris Climate Agreement – which delineates how carbon financing will be pivotal to increase the amount of countries singing onto NDCs, or a Nationally Determined Contribution towards reducing their emissions and taking part in the fight against climate change.

This is precisely why interest in the future of the carbon market continues to grow, as a whopping 83% of countries committed to reducing their carbon emissions have explained their intent to make use of the carbon market to assist them in their carbon footprint reduction journey. 

The predominant problem remains that the functionality of Article 6 in the Paris Climate Agreement itself was last negotiated at COP26 in Glasgow, but the details to ensure that all of the countries committed to reducing their carbon emissions can use the carbon market to their utmost advantage wasn’t fully fleshed out.

Given the most recent COP, COP27 in Sharm El-Sheikh, Egypt, focused on other things like the new loss and damage fund – it could be a while until all NDCs can properly utilize the carbon market.

Basically, countries determined to reduce their emissions could use the carbon market as a way to compensate for their residual emissions – helping them to achieve their emission reduction goals at a quicker rate, which is proving more necessary as climate change continues to negatively impact the planet and everyday human life.

The use of the carbon market by countries who have expressed their commitment to reducing emissions through NDCs could help those countries reduce more emissions using less resources. In other words, it’s easier to financially contribute to a reforestation project than it is to set up solar panels for renewable energy or invest in a carbon capture and storage system.

While those low-carbon resources shouldn’t be discarded entirely, the carbon market can allow lower-income countries to successfully hit their environmental targets – even if they don’t have the funding to do the most possible in the given moment. 

The carbon market can also help to support these third-party projects and organizations dedicated towards environmental improvement: such as research projects to discover new ways to cultivate and use renewable energy, reforestation projects, recycling and beach clean ups, and the construction of sustainable infrastructure.

Individuals and businesses that contribute to the carbon market through the purchase of carbon credits continue to encourage these excursions with their indirect financial support. 

However, it is important to remember that carbon credits don’t deter countries, companies, or individuals from creating carbon emissions in the first place – does that mean the carbon market could actually hinder global progress towards reducing the world’s overall carbon footprint?

How could the carbon market deter global efforts to reduce emissions?

Article 6 of the Paris Climate Agreement could provide countries and those with NDCs an easy way to offset their emissions, but some argue that it could actually hinder the world’s overall progress in the fight against climate change.

The thing about carbon credits traded amongst the carbon market, is that while they do support projects and organizations dedicated to creating environmental change, improving sustainability, and reducing emissions – the carbon market can’t change a country’s already existent, poor emission production habits which will continue to result in a large carbon footprint and created the need for things like NDCs in the first place.

In other words, countries with NDCs need to find other ways to reduce carbon emissions directly from the source – and resist the temptation to become too dependent on the carbon market

Think of the carbon market as a caffeine boost during the 3pm slump of the afternoon: having a cup of coffee in the mid-afternoon can help someone to finish their task, but it can’t replace a good night’s sleep to ensure proper rest for work the next day. Therefore, the problem with utilizing the carbon market – is that just like caffeine, those with NDCs could become addicted to it. 

Another reason why some environmentalists fear the use of the carbon market is the fact that many countries want the ability to carry their previous carbon credits established under the Kyoto Protocol to fit under the Paris Climate Agreement. This could prevent the productivity of the carbon market and the ultimate goals to reduce carbon emissions in the first place – as carbon credits that are double counted will inaccurately represent the current amount of emissions present in the atmosphere.  

Potentially, the new system could prevent the intrinsic motivation necessary to reduce emissions and fight against climate change – let alone for NDCs to meet their reduction goals.

The carbon market could prove as a helping hand for countries looking to reduce carbon emissions, but the carbon market shouldn’t be responsible for carrying the entire weight or responsibility of reducing emissions – a viable probability that could happen if the carbon market is to become more available.

Which countries make use of the carbon market the most?

Almost all countries, regardless of size and wealth, would make use of the carbon market – as the wealthier countries would have the monetary capability to continuously “offset” their emissions, and countries with less financial resources to purchase other carbon reducing technologies like a carbon capture and storage system will resort to purchasing carbon credits on the carbon market to compensate for excess emissions they can’t afford to directly reduce. 

Even if Article 6 of the Paris Agreement still isn’t fully fleshed out, there are several countries that are already making use of the carbon market to help them in their journey.

For example, countries with large forests such as Costa Rica are seeking to optimize the use of the carbon market in order to meet their NDCs. Cambodia also aims to utilize the voluntary carbon market in conjunction with their large areas of forest land, and Ghana plans to make use of the carbon market as well if it is to be discussed more in depth at next year's COP. 

What should be done to improve the carbon market moving forward? 

Worldwide efforts to fight climate change have never been more prevalent, meaning that the carbon market needs to be altered in order to adhere to this globally challenging, monumental goal.

One of the biggest environmental commitments companies are striving to meet these days is to achieve net-zero emissions by 2050, and seeing as it’s extremely difficult for a company to efficiently contribute to this target – many of these enterprises will depend on things like carbon credits and carbon offsetting projects available in the carbon market in order to help reaching net-zero emissions.

In other words, the carbon market needs to be altered in order to align with these new net-zero emission goals in accordance with climate change on the rise.

The carbon market can help countries and companies alike achieve their goals sooner, if they are to adjust the prices of carbon credits accordingly to  ensure that the impact of fossil fuels, greenhouse gasses, and carbon emissions equate to the same price of their negative impact. This can help to create the revenue needed to establish further carbon reduction tactics, and also deter people from resorting to the use of the carbon market to offset emissions in the first place. 

The overall value of carbon markets globally rose by over 20% in the last two years – showing their clear influence on the environmental actions of companies and countries around the world.

If the carbon market can align itself to push countries with NDCs and companies with strict environmental targets to reach their goals without creating a dependency or becoming a “short cut” to “reducing” emissions – the impact could be revolutionary. 

What about Greenly? 

If reading this article about the carbon market in 2022 has made you interested in reducing your carbon emissions to further fight against climate change – Greenly can help you!

Greenly can help you make an environmental change for the better, starting with a carbon footprint assessment to know how much carbon emissions your company produces.

Click here to learn more about Greenly and how we can help you reduce your carbon footprint. 

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