Carbon Market: Financing Solutions for Sustainable Development
By admin July 13, 2021

“Counting the Cost of a Green Earth” Photo by BeholdingEye via Getty Image

The science of climate change is simple. When we emit greenhouse gases (GHGs), such as carbon dioxide, more heat gets trapped in the Earth’s atmosphere, raising global temperatures and destabilizing the climate. Global temperatures started to rise during the Industrial Revolution and scientists have long predicted drastic consequences if we hit the 1.5°C mark. WMO Secretary-General Prof. Petteri Taalas noted: “Increasing temperatures mean more melting ice, higher sea levels, more heatwaves and other extreme weather, and greater impacts on food security, health, the environment, and sustainable development.”

The political path to stopping that from happening is, however, infinitely more complex. So far, with widespread consensus and track records, the carbon allowance/credit trading system (or carbon market) is an efficient financial tool to incentivize industrial groups to reduce their emissions.

This article will introduce some important carbon trading related concepts, including Carbon Permits (or allowances) vs. Carbon Offsets, Compliance vs. Volunteer Carbon Markets, and major players in this ecosystem.


Carbon Permits (allowances) vs. Carbon Offsets

A Carbon Allowance is a term used for a certificate or permit representing the legal right to emit one ton (metric ton) of carbon dioxide or equivalent GHGs. These carbon permits are government-issued digital certificates, used in cap-and-trade emissions trading schemes (ETS). In a cap-and-trade scheme, governments at regional, national, or international levels set an overall limit or cap on the amount of allowable GHG emissions, and the open market sets the price. Carbon permits are then issued or auctioned up to the agreed limit. The advantage of carbon permits trading comparing to carbon taxes is that the emission cap is controlled at a fixed number whereas carbon tax only sets the prices but leaves the amount of pollution uncapped.

The World Resources Institute defines a carbon offset as “a unit of carbon dioxide-equivalent (CO2e) that is reduced, avoided, or sequestered to compensate for emissions occurring elsewhere”.  A carbon offset is generated by reducing emissions made by a voluntary project that meets a list of conditions verified by an authorized independent third party. Project developers receive offset credits according to established rules and methodologies adopted by independent issuance and accreditation bodies.  Below are a few of the leading standards used to certify offset projects for voluntary markets: Clean Development MechanismGold Standard, Voluntary Carbon Standard, Climate, Community, and Biodiversity.


Compliance vs. Voluntary Carbon Markets

There are two types of carbon markets: compliance and voluntary. The Compliance Market is used by companies (in sectors such as power generation and manufacturing industry) that by law must account for their GHG emissions. It is regulated by mandatory national or regional carbon reduction regimes.

For example, the European Union’s Emissions Trading Scheme (EU ETS) is the world’s largest and most liquid trading program, created as a means for Europe to meet its Kyoto targets. Currently, 27 EU Member States and three European Economic Area-European Free Trade Association (EEA-EFTA) states: Iceland, Liechtenstein, and Norway are participating in the EU ETS.  And the California Carbon Allowance (CCA) ETS has a unique design that features a legislated price floor and soft cap that increases at 5% plus inflation year-over-year. The system ensures that the price for emitting carbon has a stable and controlled increase over time. The CCA ETS is also linked with the Québec’s ETS since 2014.

Individuals, companies, and organizations can use the Voluntary Market to “offset” their GHG emissions and reach their carbon targets (e.g., Net Zero). Voluntary markets are only comprised of carbon offsets, while compliance markets include both carbon permits and carbon offsets.  The present voluntary carbon market is small and fragmented, with about $300m in trades a year. However, Former Bank of England governor Mark Carney has called for efforts to create a global carbon offset market, calling it an “imperative” to help reduce emissions.


Major Players in the Carbon Market:

  1. Regulators and service providers

Regulators of the carbon markets are national or regional government entities. For example, the CCA ETS is regulated by the California Air Resources Board.

Other service providers include third-party carbon credit certifiers (UNFCCC and Private Standards), verification bodies, other advisories, etc. The Clean Development Mechanism (CDM), defined in Article 12 of the Protocol, allows a country with an emission-reduction or emission-limitation commitment under the Kyoto Protocol (Annex B Party) to implement an emission-reduction project in developing countries. Such projects can earn saleable certified emission reduction (CER) credits, each equivalent to one ton of CO2, which can be counted towards meeting Kyoto targets. The CDM is managed and run by the United Nations Framework Convention on Climate Change (UNFCCC).


  1. Buyers of carbon permits and credits

Buyers of carbon permits are companies that are identified as heavy emitters of GHGs and are in the regulated sectors set by each national or regional cap-and-trade schemes. These companies are mandated to comply with the emission caps.

There are also voluntary buyers who can be emitters or non-emitters. Purely voluntary offset buyers are driven by a variety of considerations related to corporate social responsibility, ethics, and reputational or supply chain risk. Amazon and Microsoft would be good examples in this category. Pre-compliance buyers speculatively procure offsets before a compliance carbon market start date, hoping to obtain a lower price than what the same offset may eventually fetch in the compliance program. US companies in the building and heating sectors fall into this category.

In addition, due to the increasing projection of carbon pricing, investors and commodity traders are exploring opportunities in carbon trading. Many asset managers and hedge funds have entered the carbon trading arena and developed strategies around the long-term prospects as well as trading arbitrage of carbon prices.


  1. Offset credits producers

As mentioned above, a CDM project can be issued carbon offsets, or CERs. These CERs can be traded in ETSs. The leading trading platform for the EU carbon market is the European Climate Exchange (ECX), which handles over 95% of the derivative trade on the ETS.

CERs have always traded at a discount to their EUA counterparts, due to differences in their associated risks: while EUAs are issued by the EU, and might be regarded as a “currency” with no underlying issuer risk, the CERs could be degraded or expired.


EDITOR’S NOTE: TBG is committed to a Sustainability-driven economy. We believe that the world must take action to tackle Climate Change is real and we are committed to sustainable solutions via our consulting, advisory, and investment solutions. Just send an email for more information on our Energy & Environment solutions, and TBG Capital’s Cleantech investment solutions. TBG’s President, David Solomon Bassiouni, sits on the Advisory Board of Highland Carbon, which maintains one of the most exceptional Carbon Offsetting programs in the world – with re-wilding zones in the Highlands in line with the official frameworks of the Woodland Carbon Code and Peatland Code.  Highland Carbon also offers offsetting opportunities overseas with the Verified Carbon Standard, Gold Standard and United Nations (UNFCCC-CDM) quality marks. Mr. Bassiouni works closely with the Highland Carbon team and fellow advisors to pursue the mission of a carbon-neutral future in line with the Paris #Climate Accords & #SDGs.


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Thanks for sharing !

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