How Close Are We to A Global Carbon Market?

At a Glance

  • Following Paris climate agreement, carbon trading schemes begin to take shape
  • Carbon market could resemble other global commodity markets like oil or gold

A global carbon market is in the making and though its implementation will not be easy, it does look like it has crossed its Rubicon of acceptance.

Consider this: Nearly one billion people are already living under the umbrella of carbon trading schemes that are meant to constrain the growth of dangerous greenhouse gas emissions. But, coverage could double to more than two billion people, if China adopts a national trading scheme, as expected, by next year.

The big question now is whether the series of individual, even disparate, jurisdictional umbrellas can be interconnected into a great canopy of a global trading market — stretching from California to Korea.

The big catalyst to all this was the seminal agreement reached at the U.N. Paris climate summit in December 2015 that among other measures committed a number of nations to work in tandem on carbon trading schemes.

“Many countries are serious about developing carbon trading, and are off to a good start,” says Alex Hanafi, Senior Manager, Multilateral Climate Strategy at the Washington, D.C.- based Environmental Defense Fund, noting that emission trading systems are up and running in more 50 jurisdictions today.


The Nuts and Bolts

Now an international carbon trading playbook needs to be forged to ensure a linkup of the various national and subnational schemes, which will help facilitate a stronger market and guard against abuses such as double counting.

“The next steps are going to be to put some flesh onto what is really the bare bones, the basic structure of the agreement,” Robert Stavins, an economics professor at Harvard, recently told Climate Central.

The countries involved will continue discussions on the “nuts and bolts issues” in upcoming meetings starting in Bonn in May and in Morocco in November, according to Hanafi at the Environmental Defense Fund.

To envision a global carbon market you need only look at how trading has developed in a slew of other commodities, say oil, gold or aluminum, to see how a sophisticated market place can emerge internationally.

“International exchange is key to support these processes and for taking into account lessons learned,” says Nicolas Kreibich, a research fellow at Germany’s Wuppertal Institute for Climate, Environment and Energy.

Kreibich says a key question is how to ensure integrity of the system in the transfer of emission results across borders, whether the exchange is bilateral or multilateral.

“It is still not entirely clear how countries are to account for the export and import of emission units, how to deal with the different types of mitigation contributions and the lack of legal bindingness in achieving them, and there are other questions still to be answered,” he says.


Road from Paris

There are already 17 emission trading systems operating in the world as of early 2016, covering more four billion tons of greenhouse gas emissions. But those markets will soon have plenty more company.

That’s because the Paris agreement “sent a strong signal for ambitious and sustained global climate action,” according to a 2016 annual status report from the International Carbon Action Partnership (ICAP).

“By allowing countries to use international carbon markets to meet their commitments, the Agreement has recognized the cost-effectiveness potential of market-based solutions to climate change,” the partnership report stated.

Nine new carbon trading systems were launched in Asia over the past three years but now all eyes are on China for 2017, which is slated to become the big player of carbon trading when it unifies under a nationwide system.

“China’s intention to launch a unified national carbon market by 2017 was unequivocally confirmed at the highest political level,” Qian Guoqiang and Chen Zhibin of SinoCarbon Innovation & Investment Co. Ltd, wrote in the in the ICAP status report.

Existing markets are also not standing still. In Europe, long the much-criticized leader, is looking at implementing major reforms in the coming years. Haggling is now underway within the EU on implementing its so-called Phase Four for its emissions trading system to take its carbon cutting scheme into 2030.

North America is a special case when it comes to carbon trading and you have to be looking at the glass half full to see the progress.

In Canada, Manitoba and the country’s industrial heartland of Ontario are moving on implementing carbon trading, which could provide more support to the linkup between Quebec and California.

The U.S. Clean Power Plan, under the auspices of the Environmental Protection Agency, was initially seen igniting carbon trading across the country. But the stay at the Supreme Court of the plan and now the vacancy at the top court with the death of Antonin Scalia certainly adds uncertainty.

But some 20 U.S. states are still moving ahead “by expressing their support for the Clean Power Plan, their confidence in its strong legal foundation, or affirming plans to continue working towards compliance or to secure carbon reductions from the power sector,” according to Hanafi of the EDF.


Carbon Comes to Finance

For the financial industry, carbon trading, long on promise, could see renewed vigor in the growth of products that support carbon trading. NYMEX Emissions, part of CME Group and which offers a slate of instruments in European and U.S. emissions markets, is one of several exchanges fighting for market share in this space.

Henrik Hasselknippe, executive director, energy products at CME Group, believes the Paris agreement will lead to important changes that will in turn instigate creative new market responses.

There is belief, however, that the types of products offered at exchanges will need to change and be more innovative as the carbon market evolves.

“After Paris, we have a clearer view of what carbon instruments will be,” says Hasselknippe. “As the world comes under carbon regimes that are more aligned with one another, we intend to respond as quickly as we can with products that fit the needs of participants around the world.”

He adds: “Paris is a huge step forward and the actual implementation is going to tell us a lot about the instruments.”


Will it Work?

The idea of carbon trading is not without its critics. The ultimate goal is to put a price on carbon that in the end incentivizes industry to reduce emissions of greenhouse gases that scientists widely believe are imperilling the planet’s intricate climate system.

Says Hanafi: “And that’s ultimately the key goal: harnessing the power of the marketplace to drive emissions down and investment up.


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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