carbon markets

Will developing countries carry the burden of reducing emissions for the “carbon market”?

Do carbon markets enhance developing countries' abilities in reducing emissions? Do they help them finance green projects? Or is it an ineffective tool?
Do carbon markets enhance developing countries' abilities in reducing emissions? Do they help them finance green projects? Or is it an ineffective tool?

The concept of “carbon markets” was first introduced in the 1997 Kyoto Protocol. This gave a push to the United Nations Framework Convention on Climate Change (UNFCCC) which originated from Rio de Janeiro’s Earth Summit in 1992.

According to the United Nations Development Programme, carbon markets are trading systems in which carbon credits are sold and bought. This is an attempt by countries to adhere to the permitted national limits of carbon emissions, in which “one tradable carbon credit” equals one tonne of carbon dioxide.

There are two types of carbon markets. One, the compliance market which is created as a result of any national policy or regulatory requirement, and second, the voluntary market where governments or companies voluntarily participate to reduce their emissions or offset their carbon footprint.

More than two-thirds of the world’s countries plan to use carbon markets to meet their nationally determined contributions combating climate change under the 2015 Paris Agreement, according to the World Bank.

Can carbon markets succeed in supporting advanced countries to reduce their emissions, and help developing countries in financing green projects?

Dr Hesham Eissa, former Egyptian point of contact at the UNFCCC, and a member of the Union of Arab Environmental Experts, found carbon markets to be a supportive mechanism for countries to implement their national commitments related to reducing emissions. But, he warned that they are not the main mechanism, and care should be taken to not put “the burden of reducing emissions from advanced countries to developing ones.”

Elaborating this, Eissa told Scientific American that in the long run and with the increasing costs of reducing emissions in advanced countries, there may be an increase in advanced countries using carbon markets to reduce emissions in developing countries as a cheaper alternative. However, in such scenarios, while the developing countries might end up using renewable energy, the advanced country may use the opportunity to justify the continuing use of fossil fuels in their own country.

Eissa pointed towards the need to have clear rules for regulating carbon markets. Advanced countries should not entirely depend on that market, he added, and should commit to buying only about 10-15% of the total emissions they reduce. Such countries should continue to reduce their emissions in various other ways, Elissa said.

Eissa indicated that Kyoto Protocol, implemented in 2005, stipulated mechanisms to help advanced countries reduce their emissions via three main ways – reducing emissions internally, establishing partnerships with other countries in order to reduce emissions together, and Clean Development Mechanism, which allows countries to fund emission reducing projects in other countries and claim the saved emissions as part of their own efforts to meet emission targets. 

 “The idea of carbon markets emerged from here, where advanced countries could establish projects in developing ones to reduce emissions, or buy carbon credits,” Eissa said, clarifying that the Article 6 of Paris Agreement enables countries and organisations to use such market mechanisms and exchange carbon credits

According to Eissa, COP 26 witnessed a “pivotal update” regarding carbon markets through the new mechanism of corresponding adjustment. Through this method, the country that sells carbon units adds the figure to its emission level, and the country buying it subtracts it from their emissions. 

Carbon Revenues

Carbon revenues earned through the carbon market can be an important source to fund combat against climate change. Between 2021 and 2020, the global carbon pricing revenues increased by almost 60%, to around $84 billion, according to a May 2022 report issued by the World Bank. This provided a finding source to help support a sustainable economic recovery, finance broader fiscal reforms, or invest in communities as part of the low-carbon transition, the report said.

The report said that carbon markets mobilise resources to help countries and companies easily transition to a low-carbon economy. It noted that trading carbon credits may reduce the cost of implementing national contributions to combat climate change by more than half. The report also expected that over time carbon markets may become redundant, as countries begin reaching their net zero carbon emissions, and the need for carbon trade might diminish. 

In this context, Joseph Pryor, a senior climate change specialist and the leading author of the report, told Scientific American through an email exchange that they estimated this cost of implementing national contributions based on collecting estimates of revenues generated from government officials trading carbon credits.

Joseph Pryor described pricing carbon as an “integral political instrument” which can help achieve global emissions mitigation goals and support comprehensive decarbonization. Yet, he added, it cannot be seen as the “only solution,” but one among many ways to achieve climate goals, like pumping investments into renewable energy and sustainable transportation projects, and enabling consumers to find other alternatives after increasing carbon-intensive services prices.

When asked whether carbon markets might encourage some countries to be complacent in reducing their emissions, he said, “Carbon pricing is a cost-effective policy tool that governments and companies can use as part of their broader climate strategy. If designed effectively, it will help create strong economic incentives for the required changes in investment, production, and consumption patterns. Its revenue also represents significant benefits for investing in projects that help provide clean air and water, improve human health, create safer and less congested roads, increase energy and food security, and enhance macroeconomic stability”.

“Carbon taxes can play a role in increasing revenues financing carbon elimination projects, addressing inequalities in bearing the responsibility towards climate changes, as well as supporting a sustainable post-COVID-19 recovery,” added Pryor.

Emissions Trading System

Emissions Gap Report, issued by UN Environment Programme last October, concluded that there are seven countries and political and geographical entities that alone caused more than half of greenhouse gas emissions in 2020–this included China, the European Union, India, Indonesia, Brazil, the Russian Federation and the United State, whereas the Group of Twenty states alone were responsible for three-quarters of the emissions.

The European Environment Information and Observation report, published on January 12th concluded that “emissions trading system in the European Union has declined by 11.4% between 2019 and 2020, the largest annual drop since the start of the EU Emission Trading System in 2005. This was driven largely by decreases in power demand and industrial activity due to the COVID-19 pandemic.”

The report stated: “Significant efforts are still necessary to bring EU emissions on to a path to achieve climate neutrality by 2050.”

In response to a comment on whether specific conditions might enhance the effectiveness of carbon markets to promote climate action, Christopher Nelson, Deputy Chief Commissioner of the UNFCCC said, “Carbon markets are an ideal opportunity to increase our ambition in climate action.”

“I live in Sweden, one of the EU countries and a country participating in carbon markets. There is action to be taken inside the country to reduce emissions, in addition to the global action,” continued Nelson. “What we really need is to perceive the idea of carbon markets as an opportunity to increase climate action and do more to achieve our goals, and not just as an excuse for not taking ambitious measures to reduce emissions.” He added that the rules laid out by COP26 in Glasgow last year regulating carbon markets “are a great start.”

Teresa Ribera, Spanish Minister of Environmental Transformation and Demographic Challenge during her participation in COP 27 held in Sharm El-Sheikh, Egypt, told Scientific American, “The extent of carbon markets effectiveness depends on ensuring that countries will also continue reducing their emissions, and that there is accountability and transparency in such commitment, because we cannot deceive ourselves nor deceive the climate action system in the world. If carbon markets do not become effective to achieve climate goals, it will not make sense to proceed with them and will further complicate the situation.”

This story was originally published in Scientific American– Arabic edition, on 24 December 2022

Hadeer El-hadary
Hadeer El-hadary is a freelance Egyptian journalist. She’s written for Egyptian and Arab websites such as Scientific American, Vice Arabia, and Shorouk News. Her work focuses on the topics of environment, climate change, science, health and women’s rights. She’s won an award from the Egyptian Journalists Syndicate for an environmental story about converting date palm seeds into fuel and other products, and another award from Plan International organization and the Ministry of Social Solidarity for a story about discrimination against women in job interviews.