Part 02: Understanding Carbon Markets.

November 11, 2021

As climate change becomes an increasingly tangible concern, reducing carbon emissions (or achieving net zero emissions) is quickly becoming a priority. In this series piece we unpack the realities of carbon offsetting - the good, the bad, and the ugly - to show how it can (and can’t) be part of an impactful sustainability strategy for your company.

Did you miss the previous part? Catch up in the link below

Understanding Carbon Markets: The who, how, and why of offsetting

Last week we laid out the theory of carbon offsetting, but how did this carbon mitigation strategy become so ubiquitous… and how does it actually work?

Carbon offsetting emerged from the 1997 Kyoto Protocol’s cap-and-trade framework. The “cap” refers to the theoretical limit for each participating nation’s annual carbon emissions, encompassing all industries. Each party receives a set number of permits (aka carbon credits) for carbon emissions. There are financial penalties for exceeding the allocated carbon budget. Carbon permits can be bought and sold on the so-called carbon market, or acquired by investing in carbon offsetting schemes. This constitutes the “trade” part of cap-and-trade.

The Kyoto framework was designed to set a ceiling to global emissions, while allowing flexibility for how (and by whom) carbon quotas would be spent, all while encouraging sustainable development in developing nations, and incentivising investment into new green technologies through offsetting schemes. 

There are two arms to the carbon market. First came the “voluntary” carbon market,  which exists in absence of any third party regulation. Carbon credits traded on the voluntary market are called Voluntary Emissions Reductions (VERs). Trading occurs between companies, private organisations and individuals wishing to reduce their net emissions on a voluntary basis, independent of (or going above and beyond) Kyoto regulations. The voluntary market includes the 100+ developing nations (including India and China) which were exempted from Kyoto Protocol caps, as well as the USA. As such, the voluntary market is a significant piece of the global carbon market.

On the flip side is the “compliance” market. As the name suggests, it facilitates mandatory alignment with emissions limits, as dictated by Kyoto rules. Trading is regulated by government bodies of participating nations, and credits traded on the compliance market are called Certified Emissions Reductions (CERs). Note that VERs cannot be traded on the compliance market to fulfil Kyoto obligations, due to VERs being unregulated. However, this is not to say that CERs are without flaws, as we will discover later in this series.

To summarise: Kyoto-mandated emissions caps apply to selected countries (37 nations, if we’re counting), and carbon credits (VERs and CERs) can be traded to comply with the legal emissions caps, or to voluntarily reduce net emissions. Offsetting projects are designed to generate extra carbon credits, which can be purchased to further reduce net carbon emissions. So far, so simple? If only.

In practice, the carbon market is complicated and difficult to navigate. There are multiple tricky variables to wrangle: carbon allowances must be fairly allocated, emissions must be correctly calculated, and credits need to be tracked as they are used, bought, and sold. As for offsetting schemes? The projects must stand up to scrutiny. The carbon market is a minefield, and it can be daunting to know where, or if, to invest in carbon offsetting schemes.

Want to understand the hows and whys of offsetting?  

So what are the hallmarks of a good offsetting project?  Read part 3 through the link below

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About the author:

Helena Maratheftis writes regular content for Converge. She is a creative with an academic background in biology (BA) and the environmental sciences (MSc). Her special interest lies in science communication.

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