Carbon markets have been in the works since the 1990s, when countries began to look towards emission trading and carbon credits as a way to limit emissions and reduce the global effects of climate change. The main idea is a market-based approach to carbon emissions, where economic incentives are offered to participating emitters who reduce or limit emissions within a threshold.
Measures may include:
- Quantitative total limits on emissions produced by participating emitters
- Automatic market price adjustment based on the total emissions limit
- Allocation of carbon credits (or ‘offsets’) to participating emitters
- Buy/sell trading mechanisms of carbon credits between participating emitters
These force emitters to take responsibility for their carbon emissions or if failing to, compensate by purchasing offsets to reflect a decrease in emissions elsewhere. Carbon credit programs can incentivize emitters to pursue a long-term reduction in carbon emissions, as well as create competitive pressure to research into other ways of energy generation (e.g. sustainable biofuels).
Carbon market developments at COP26
In November 2021 during the COP26 conference, almost 200 national representatives closed some of the biggest loopholes in the carbon market. One significant measure taken was to make it impossible for carbon credits to be double counted by the buyer and seller countries. This ensures greater transparency in global carbon credit programs, and holds participants accountable during the trading process.
However, the COP26 conference did not delve further into the topic of voluntary carbon markets, reflecting existing gaps in global carbon market measures.
Common criticisms of carbon credits
As we move closer towards a global climate emergency, more public and private enterprises are looking towards carbon markets and carbon credits as a way to further encourage emissions reductions. However, there are some common critiques levelled at how carbon markets are implemented:
- Cross-market inconsistency: Carbon credits used in one market may not be applicable to another, making it difficult and inconvenient to pursue carbon credits trading as a long-term sustainability measure.
- Lack of defined budgets: There are various carbon market programs operating worldwide but without a standardized budget or emissions limit.
- Limited voluntary participation: Many carbon markets are regulated, with few opportunities for voluntary participation by the private sector.
Critics have described carbon markets as “greenwashing” with uneven consequences for the Global South that could result in “climate colonialism”. Some also see carbon markets as a half-hearted measure that does not actively discourage the use of fossil fuels compared to outright bans or restrictions on emissions.
Why carbon credits could still work
Despite the critiques, carbon credits should not be dismissed as a climate solution just yet – especially when considering voluntary carbon markets.
Compared to mandated trading schemes in regulated carbon markets, voluntary carbon markets allow the private sector to buy carbon credits from enterprises or schemes which have reduced or removed carbon emissions elsewhere. This creates a direct incentive of high capital flows from the private sector to participating emitters, and can encourage participants to pursue carbon reduction projects in the long run.
As more private investors are making net-zero commitments and prioritising companies with good ESG practices, voluntary carbon market programs can reflect an open endorsement of companies that have adopted tangible sustainability practices. If carbon markets are operated with the right values and outcomes in mind, there is great potential for run-off effects that could benefit not just the environment, but local communities as well.
