Overview of Global Carbon Emission Trading Systems and Markets
Emission trading (ETS) for carbon dioxide (CO2) and other greenhouse gases (GHG), often known as cap and trade (CAT) is a form of carbon pricing. It is a strategy to control climate change by developing a market with constrained emission allowances. This might make fossil fuels less competitive and hasten the development of low-carbon energy sources like wind and solar. The biggest factor contributing to climate change is fossil fuels. They are responsible for 68% of GHG emissions and 89% of CO2 emissions. One of the reasons why emission trading should be implemented is that the emitters of greenhouse gases (GHGs) do not bear the full cost implications of their activities, which is the economic dilemma with climate change. These additional expenses are known as external costs. The welfare of others may be impacted by external costs. In the case of climate change, GHG emissions have an impact on both the present and future well-being of people as well as the environment. The trajectory of emissions will determine the social cost of carbon. The dynamic price model of carbon trading can help with it. One emissions permit is equivalent to one tonne of carbon dioxide (CO2) emissions in the context of emissions trading when greenhouse gases are regulated. Carbon credits, Kyoto units, allocated amount units, and Certified Emission Reduction Units are examples of additional emissions permits (CER). These licenses may be purchased privately or on the global market at the going rate. These engage in international commerce and settlement, enabling the transfer of permits between nations. The United Nations Framework Convention on Climate Change certifies each international transfer (UNFCCC). The European Commission also certifies every ownership transfer that occurs within the European Union.
By enabling private trading of permits, emissions trading programs like the European Union Emissions Trading System (EU ETS) supplement the country-to-country trading outlined in the Kyoto Protocol. A national or international authority will assign permits to specific companies under such programs, which are typically coordinated with the national emissions targets provided within the framework of the Kyoto Protocol, based on predetermined criteria, with the goal of meeting national and/or regional Kyoto targets at the lowest possible overall economic cost.
While other greenhouse gases are also traded, their global warming potential is expressed in standard multiples of carbon dioxide. These characteristics guarantee that the quotas are satisfied on a national and worldwide level while minimizing the financial impact of the quota on business.
The largest carbon trading program in the world is in China. It is an intensity-based trading scheme that went into effect in 2021 for China’s carbon dioxide emissions. The system’s initial layout aims to save 3.5 billion tons of carbon dioxide emissions from 1700 installations. It has voluntarily committed under the UNFCCC to reduce CO2 per unit of GDP by 40 to 45% from 2005 levels by 2020.
China allowed carbon trading pilot experiments in seven provinces and cities in November 2011—Beijing, Chongqing, Shanghai, Shenzhen, Tianjin, Guangdong, and Hubei—each with a different pricing. The pilot is intended to test the waters and offer valuable insights for the design of a future national system. Therefore, their triumphs or failures will have significant effects on how China’s carbon market develops in terms of public confidence in a national carbon trading market. Trading could begin in some of the trial zones as early as 2013 or 2014. Trading on a national scale is anticipated to begin at the earliest in 2020.
The initiative to launch a nationwide trading system has run into several issues that have taken longer than expected to resolve, mostly because of the challenging process of gathering early data to establish the baseline level of pollution emission. Eight industries, including chemicals, petrochemicals, iron and steel, non-ferrous metals, building materials, paper, power, and aviation, are initially planned to be included in the trading system. However, many of the companies engaged lacked reliable data. As a result, even though the market hasn’t yet started operating, the distribution of emission allowances began by the end of 2017, however it was only for the power industry and will progressively expand. Companies that participate in this system will be asked to fulfill a goal level of reduction, and the level will gradually contract.
With the implementation of China’s nationwide carbon trading plan in 2021, the trade of carbon emissions increased significantly. The cost of coal power has increased as a result of the rising permit prices under the EU ETS.
The G8 Climate Change Roundtable, a corporate organization established at the January 2005 World Economic Forum, brought together 23 global firms. Ford, Toyota, British Airways, BP, and Unilever were among the participants. The Group released a statement on June 9, 2005, emphasizing the necessity for market-based solutions and the urgency of taking action against climate change. It urged governments to create “a long-term policy framework” that would involve all significant greenhouse gas producers in order to develop “clear, transparent, and consistent pricing signals.”
By Yimeng CHEN
