Restoring credibility to the Carbon Trade

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Carbon markets 101

July 3, 2020


This briefing gives an overview of the current discussions under Article 6 of the Paris Agreement which establishes the foundation for market-based climate measures after 2020. It lays out key lessons from the Kyoto Protocol markets, highlights essential issues within the Article 6 negotiations, and provides recommendations on how to solve them. It concludes with an overview of non-Article 6 carbon markets, which have ties to the Article 6 discussions, such as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), a carbon market specifically designed for airlines.

Trading greenhouse gas emissions

Carbon markets are one of the tools to tackle the climate change problem, i.e. the accumulation of greenhouse gases in the atmosphere. Since we only have one atmosphere, it does not matter where the emissions are released, because they will soon spread around the earth, creating a greenhouse effect. Following this logic, if a group of people, countries or companies agrees to limit their emissions to a certain amount (aka adopt a “carbon budget”), it does not matter how much each person emits, or where they do so, as long as the whole group does not emit more than what they committed to. Since it doesn’t matter where we reduce emissions, the argument behind carbon trading is that the best way to take climate action is to reduce emissions where it is easiest (i.e. least costly) to do so.

To this end, governments around the world have established carbon markets, where emissions (or emissions reductions) can be ex-changed from one entity to another. In theory, as long as we control the total amount of emissions traded in the market, it does not matter for the climate who buys or sells. Of course, in practice, establishing a global, or even national, carbon market is a challenging task. There are significant risks that the systems contain loopholes which can result in this policy having little to no impact on reducing emissions.

Author: Gilles Dufrasne

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