International carbon markets are in some upheaval – various international agreements on how they should work are ending, and other arrangements are just getting off the ground.
So there’s plenty of uncertainty, but also potential opportunities for the environment, for investors and for business.
The two main agreements are:
i) The United Nations Framework Convention on Climate Change (UNFCCC), which sets the international framework for addressing manmade climate change. It encourages efforts to stabilise harmful greenhouse gas (GHG) emissions, since these are the key cause of man-made global warming, but it doesn’t enforce any binding reduction targets
ii) The Kyoto Protocol. In contrast to the UNFCCC , this commits developed countries to binding GHG emissions reduction targets.
As a bit of background, most measures to cut GHG emissions are at national level (ie, country by country).
However, Kyoto brought in market-based mechanisms, including the clean development mechanism (CDM) and joint implementation (JI).
CDM involves projects in developing countries, while JI involves projects jointly carried out in developed countries.
Both use ‘credits’, traded in international carbon markets. Companies which are legally required to do something about their emissions under local laws buy, surrender and sell credits to meet their obligations.
It’s complicated, and not everyone agrees it’s the best way to reduce GHGs – but it does channel funds for low-carbon projects, and promotes the transfer of clean technology to developing countries such as India, South America and Africa.
The Kyoto arrangements are about to enter their second phase (it starts in about six weeks’ time, on January 1, 2013, and ends on either December 31, 2017, or December 31, 2020).
EU countries are firmly on board – some other countries, including Japan and Russia, have indicated that they won’t participate, and Canada has backed out of Kyoto altogether.
Under the UNFCCC there are plans for market-based mechanisms to give non-Kyoto countries access to international carbon markets.
UNFCCC also establishes a Green Climate Fund, aimed at helping the transfer of funds to developing countries to support climate change measures.
Many environmental groups are worried that these things aren’t ambitious enough to reverse dangerous man-made climate change – only this week, the World Bank issued a plea for quicker and stronger action against climate change.
But they do at least work towards some global agreement on GHG emissions reductions.
For example, the European Union uses a ‘cap-and-trade’ system for companies. This means an economy-wide cap on emissions, and companies emitting GHGs must work with an allocation of ‘allowances’ each year.
Allowances are either allocated to companies (in an amount linked to the company’s cap), or bought in the market – which costs money, and therefore encourages the company to cut GHGs. From 2013, EU electricity-generating companies will generally have to pay for 100 per cent of their allowances at auction (ie, they won’t get any free ones).
Other industries will still be allocated some free, but 20 per cent will have to be paid for in 2013, increasing to 70 per cent in 2020, with no free allocation in 2027. The overall EU-wide cap on allowances is being reduced by 1.74 per cent each year, so as to hit the EU’s target of a 20 per cent cut in GHG emissions in 2020.
The money raised by government auctions of allowances will stay in those countries – half must be used to cut GHG emissions further.
This might be through development of renewable energy technology, or measures to improve energy efficiency/reduce deforestation.
The World Bank says that the value of the international carbon market grew by 11 per cent in 2011 to US$176 billion, and transaction volumes amounted to 10.3 billion tonnes of carbon dioxide equivalent – so there is definitely potential.
But with the situation growing ever more urgent, many feel we need to use the systems I’ve described above to make much quicker cuts.
Next week we’ll look at the Isle of Man’s place in all this – what is our government doing to help the island play its part in this, possibly the greatest challenge mankind has had to collectively take on?
If you’d like to join Friends of the Earth in working for a livable planet, email us at iomfoe(at)manx.net.