Climate | ~ 3 min read

Carbon trading: time for change?

Carbon markets enable companies to reduce their carbon emissions by trading them for purchased carbon credits or carbon offsets. But the role of these markets in decarbonisation has divided opinion, highlighting that change is needed.

There are two types of carbon trading markets: mandatory and voluntary. Mandatory carbon markets (or compliance markets) are based on the European Union’s Polluter Pays Principle1 where high-emitting companies must pay for a certain number of credits each year. Voluntary carbon markets (VCM) allow governments or companies to reduce their emissions through purchased carbon offsets which can be used to fund decarbonisation projects.

While this sounds positive, development of these markets has faced sustained challenges, particularly a divergence in the cost of carbon. The price of carbon in mandatory trading can vary as much as 10-fold2 across existing markets in different locations. Between voluntary and mandatory markets, the cost of a carbon credit could range from USD 5-100/ton.

Another challenge is that although mandatory carbon markets have existed for 18 years their development has been limited by the absence of industry standards. Currently less than 20% of global greenhouse gas emissions are covered by mandatory carbon trading. For VCMs, lack of regulation is a major obstacle preventing their expansion. Evolution is needed for both markets to develop globally.

With VCMs seen as a critical tool to address unavoidable emissions, the good news is that so far 2023 has been a year of significant innovation and development in carbon trading. New European regulations, a rising number of local carbon trading markets, and new operating rules for voluntary markets are important steps forward. However, understanding and agreement on these developments remains elusive, so where does this leave carbon markets?

Finding a way forward

We welcome recent developments like the new Voluntary Carbon Markets Integrity Initiative (VCMI) Code of Practice, which aims to support companies by providing guidance on the high-integrity use of voluntary carbon credits. For mandatory carbon trading, we believe the current scale has potential to develop into a global market. However, progress seems hindered by a lack of willingness from stakeholders, compounded by the need for strict and clear regulation to achieve the ambitious growth estimates for carbon offsets.

Ultimately, there needs to be consensus on a standard value of the price of carbon. This could incentivise the development of solutions for emissions removal – and help to achieve the critical goal of reducing emissions.

Read more about the role of carbon offsets in net-zero pathways in our article: Carbon offsets: debate to define role in net zero

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