The Ambitious March of the Global Carbon Market

At a Glance

  • As countries look to curb carbon emissions, the gas is increasingly looked upon as a tradeable commodity
  • The U.N. climate talks in Paris may offer an opportunity to establish a global carbon pricing system

Commodity traders know how to deal in the hard stuff. Throughout history, farmers, producers and merchants have coalesced at vital meeting places to haggle over everything from gold to oil, from wheat to coffee.

Now in the early going of the 21st century the world is looking to trade in a big way something more ethereal — a commodity that could prove crucial in dealing with one the world’s most serious existential threats.

We are talking about carbon trading of course.

Many believe putting a price on carbon is the best way to constrain the emissions spewing into the atmosphere, which is blamed on a warming of the planet by nearly 1 degree centigrade since the dawn of the Industrial Revolution.

But how does one go about pricing such a vexing commodity? In what seems a part of a growing call from a number divergent groups, the president of the World Bank, Jim Yong Kim,  has made a new plea  for market solutions to curtail emissions. “We must design the best ways to price carbon in order to help cut pollution, improve people’s health, and provide governments with a pool of funds to drive investment in a cleaner future and to protect poor people,” he says.


The Carbon Restraint Riddle

Finding the “best ways” to price carbon is a contentious issue, however. It could involve everything from a simple tax to the more complex cap and trade schemes, a method favored by market-oriented experts and by a growing number of countries and companies. The concern is whether effective market based schemes can be forged into a workable global system where all play by the same rules.

“We believe that cap and trade is the best way to price carbon,” says Jeff Swartz, Director of International Policy at the International Emissions Trading Association, or IETA, “The cap ensures that the environmental objective – emissions reductions – is met, while allowing the price to react to other factors such as economic fluctuations – a functionality that other tools, such as carbon taxes, lack.”

The number of schemes to price carbon, either planned or implemented, has doubled since 2012, according to the World Bank. Existing carbon pricing regimes include 40 countries and 23 regions now,  which represents the equivalent of 7 billion tons of carbon, or 12 percent of annual global greenhouse emissions.

Swartz of IETA says at the beginning of 2015 40 percent of Global GDP was subject to an emissions market, and this figure will “soar” with the addition of  China’s newly announced national emissions trading system that is set to begin in 2017.


All Roads Lead to Paris?

Market forces are not about to wither away, especially with the upcoming UN climate talks in Paris in December.

“The Paris agreement will chart the way for climate policies for years, if not decades, to come, so it’s important to get it right and ensure you have every tool available to you – particularly given the scale of the climate challenge,” says Swartz.

It is hoped that any accord in Paris will spark arrangements that will allow the disparate carbon pricing schemes to link up, which would lead to cost savings and deeper emissions cuts globally.

For now, the roads of optimism over containing climate change lead to Paris. Most of the world’s major countries in the runup to Paris have made major pledges to reduce or at least limit their greenhouse gas emissions.

The pledges, which are commitments for the next 10 to 15 years, should keep the world from heating up by more than 2°C — a widely accepted goal by governments globally — over that period, according to a new analysis by Climate Interactive and the MIT Sloan School of Business.

The caveat is that further work is needed to stop heating up after the pledges expire. It’s key that without the country commitments, the world is currently on a pathway for temperatures to rise by 4.5 degrees, which many experts see as dangerous to catastrophic for the planet.

Andrew Jones of Climate Interactive said that the pledges show “that with further action following the Paris negotiations we can keep warming below 2°C. The current barriers are political and social and, we believe, can be overcome.”


Harnessing Market Forces

But even if there is broad agreement in Paris, how will it work on the practical level where industry is compelled to take their carbon to a market so emissions can be slashed?

There are instruments in place already. The New York Mercantile Exchange, for example, has been involved in emissions trading since 2008. NYMEX, now part of CME Group, offers a slate of such products for U.S. emission markets and in Europe, including contracts tailored for the oft-criticized EU Emissions market.

There is belief, however, that the types of products on offering will need to change and be more innovative as the carbon market evolves after the Paris meeting.

Henrik Hasselknippe, senior director, energy products at CME Group, believes the Paris talks will lead to evolutionary but still very important changes that will in turn instigate creative new market responses.

“Once the policy gets defined we will have a much clearer view of what the instruments will be,” Hasselknippe told OpenMarkets. “But it is something we are following very closely and we intend to respond as quickly as we can when the landscape is clearer than it is today.”

He adds: “Further work needs to be done after Paris. But following Paris a level of ambition will be set that will be a huge step forward and the actual implementation of that ambition is going to tell us a lot about the instruments.”


China, Big Oil Startle

Big savings are envisioned if countries can provide a bridge across borders to integrate carbon markets. But that could prove a major challenge for the international community, especially given the strong opposition among some groups against carbon pricing.

A catalyst to the movement has been a renewed push by the two biggest emitters, China and the United States. President Obama has made climate change a legacy issue and has used administrative powers to curtail emissions, although the White House failed in its attempt to enact a cap and trade system  in Obama’s first term.

Some global multi-national energy companies are increasingly calling for action on climate as well. While U.S. oil giants such as ExxonMobil remain opposed to carbon pricing,  European giants, including Royal Dutch Shell stunned many with its recent call for action on creating a global carbon pricing system.

“We owe it to future generations to seek realistic, workable solutions to the challenge of providing more energy while tackling climate change,” the executives said in a letter Financial Times revealing their plan.

Illustrious or Over Ambitious?

The emergence of a global carbon market is in its infant stage and it would seem the concept is not quite the radical experiment as many perceived just a few years ago.  Markets  take time to evolve, and for carbon emissions, it will need to be proven that markets can be just as adept at trading a colorless, odorless pollutant as they are at trading hard commodities.

Russell Blinch has extensive experience writing about commodities, energy and the environment. His work has appeared in numerous outlets such as the Guardian, DeSmogBlog, Huffington Post, Reuters and at his own site, Russell was previously a senior editor with Thomson Reuters where he wore many hats—correspondent, bureau chief, and specialist editor – while being stationed in Ottawa, San Francisco, Singapore, Washington, DC, and Toronto.

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