Amid pledges to phase out coal and reduce methane emissions, world leaders also agreed at the recent UN Climate Change Conference (COP26) in Glasgow to reform global carbon markets and improve carbon trading rules, as key tools for the transition to decarbonization.
Carbon trading is a system where a government limits the amount of carbon that can be emitted and then divides that amount into units. These units are assigned to different groups, industries and companies and can then be traded like any commodity.
Proponents say carbon trading will ultimately increase investment in green solutions as the price of carbon affects the competitiveness of fossil fuel projects while creating incentives for low carbon energy sources like wind and solar.
In fact, the International Emissions Trading Association says carbon trading has the potential to cut the cost of meeting national emissions targets in half, and an estimated 250 billion years annually by 2030 at no additional cost.
While some countries already have their own domestic emissions trading systems – and have already operated cross-border emissions trading – the participants in COP26 agreed on transparent and uniform rules for international emissions trading.
This means that countries struggling to reduce emissions can partially meet their climate goals by buying offsetting credits from other countries that have successfully reduced their own emissions.
The agreement also enables the creation of a separate carbon offset market administered by the United Nations, on which both states and private institutions can trade carbon credits from low-carbon projects.
For example, one party could pay to build a solar system instead of a coal-fired power plant for another party. The latter – and more generally the world – would benefit from cleaner energy, while the former would generate carbon credits for the project.
With the signing of the deal, the world’s leaders finally implemented Article 6 of the 2015 Paris Agreement, which had been delayed for six years due to a number of disagreements between countries.
The deal also tightened the rules for double counting credits, preventing carbon credits from being counted by both the land it sold and the land it bought.
Exporters of emission certificates
Although the effects are global, the implementation of Article 6 is likely to have different effects on developed and emerging economies.
Most developed nations are likely to be carbon buyers, while most emerging economies are likely to export carbon credits. With this in mind, the rules to clarify international trade should offer emerging economies significant opportunities.
For example, the Brazilian Ministry of the Environment claimed the deal was a “Brazilian victory” as the country would become a major exporter of emission allowances. Given that Brazil is home to much of the Amazon and has significant potential for building renewable energy projects, the implementation of Article 6 is intended as an incentive to invest in projects that significantly reduce emissions.
In addition, the agreement will support emerging economies through an adjustment fund. About 5% of all offset trading proceeds go to the fund, which helps lower-income countries in their efforts to combat the effects of climate change.
Indonesia researches carbon trading
While domestic carbon taxes and emissions trading systems are mostly focused on wealthier countries, some emerging economies are making progress in this regard.
Mexico, Colombia, Chile and South Africa have introduced or planned, among other things, an emissions trading system or a CO2 tax.
Another country that could soon be added to this list is Indonesia.
In mid-November, international media reported that the Indonesian government had signed new rules on CO2 trading.
Similar to other CO2 trading systems, the Indonesian model would include a so-called cap-and-trade system that limits overall pollution and allows certificates to be traded between companies.
The country is reportedly set to roll out a carbon tax in April next year, with the full-fledged carbon market set to be operational by 2025.
Indonesia predicts that without international help it will be able to cut emissions by 29% by 2030; with foreign funding and technology, however, that proportion rises to 41%.
Greenwash open the door?
Although seen by many as a key tool on the road to decarbonization, emissions trading is not celebrated everywhere.
Critics argue that the system could simply lead to greenwashing and that it could provide industrialized countries with an incentive to offset their CO2 emissions by buying CO2 certificates from other countries instead of reducing them.
In fact, some environmental groups say the system could result in emission allowances being shifted from one end of the world to the other without significant benefit to the environment.
In fact, Tina Stege, the climate commissioner for the Marshall Islands, warned that there was still a lot of work to be done to realize the benefits of the COP26 agreement.
“Under Article 6, we must remain vigilant about greenwashing, protect environmental integrity and protect human and indigenous peoples’ rights,” she wrote on Twitter.
“But a plan is only as good as it is implemented. All parties must now go home and get to work to meet their Glasgow and Paris commitments. “
From Oxford Business Group
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