【Certified ESG Analyst Insights Sharing】Delton Lau, CESGA

※ What is Carbon Emissions Trading?

The problem of global warming caused by greenhouse gas emissions is referred to as a “negative externality” in economics. It happens when the entities emitting greenhouse gases cause harm to the external environment without paying any compensation, turning the costs that should be borne by individuals into costs borne by society as a whole. Among the gases, carbon dioxide contributes the largest proportion to the problem of global warming, at approximately 25%. Therefore, greenhouse gas trading often uses tons of carbon dioxide equivalent (tCO2e) as the unit of measurement. The objective of greenhouse gas trading is to achieve the “polluter pays” principle by trading carbon emissions rights in the free market. Carbon emissions trading is essentially the trading of greenhouse gas emission rights (emission reduction) based on the “United Nations Framework Convention” on Climate Change. As mentioned in the “Kyoto Protocol”, its aim is to reduce global greenhouse gas emission. 

Currently, there are two major types of carbon markets: Compliance Carbon Markets (CCMs) and Voluntary Carbon Markets (VCMs). CCMs, such as the European Union Emissions Trading System, offer market participants a regulated mechanism for trading carbon emissions allowances. Each allowance represents the permission to emit one ton of carbon dioxide issued by regulatory authorities. On the other hand, participants in the VCMs include buyers of carbon credits, often enterprises. Each carbon credit is usually issued by self-regulated organisations and represents a tonne of emissions avoidance or removal. They can neutralize or offset the buyers’ own carbon emissions. These rights are traded using “carbon credits” as a medium and can be sold multiple times.

※ Are Carbon Markets Becoming “Greenwashing” Markets? 

In May 2023, the World Bank released the “State and Trends of Carbon Pricing 2022”, which indicated that there are 73 active carbon pricing systems globally, accounting for approximately 23% of global greenhouse gas emissions. The global revenue from carbon taxes and emissions trading systems (ETS) reached a record high of around $95 billion. However, the global VCMs still lack well-established global auditing standards and regulations, leading to questions about their authenticity and whether they truly achieve carbon reduction. In January this year, investigations by Germany’s “Die Zeit” and the United Kingdom’s “The Guardian” revealed that over 90% of the rainforest-related carbon credits issued by the key verifying organisation VERRA do not make substantive contributions to carbon reduction. This has led to criticisms that global VCMs are becoming tools for enterprise “greenwashing”.

In view of this, in March this year, the Integrity Council for the Voluntary Carbon Market (ICVCM) announced the 10 Core Carbon Principles. Besides, the Voluntary Carbon Markets Integrity Initiative (VCMI) published the Claims Code of Practice in June. It establishes Silver, Gold and Platinum as three levels of claims. Companies adopting the code are required to make public commitments to achieve science-based net-zero carbon emissions targets by 2050 and set interim goals in respect of the commitments. It is also hopeful that carbon credits certified under these standards will be issued by the end of the year, which will enhance the credibility and transparency of the VCMs.

It is hoped that in the future, countries will further regulate the supply of carbon emissions allowances, encouraging market participants to reduce carbon emissions as much as possible to lower the cost of purchasing carbon emissions allowances. Furthermore, enterprises should first focus on reducing carbon emissions in their production processes, and carbon offsetting through carbon credits should be considered a “last resort” and used cautiously. This is to avoid the risk of misprioritisation where carbon emissions allowances are simply transferred to others who need them, resulting in superficial carbon neutrality and even suspicions of “greenwashing.”

References:

1. https://www.worldbank.org/en/news/press-release/2023/05/23/record-high-revenues-from-global-carbon-pricing-near-100-billion

2. https://icvcm.org/the-core-carbon-principles/

3. https://vcmintegrity.org/vcmi-claims-code-of-practice/

Article is written by EFFAS Certified Environmental, Social, and Governance Analyst (CESGA). CESGA is highly recognized in Europe and globally which has been steadily increasing in the worldwide. If interested in enrolling, please refer to https://bit.ly/3tFUQ1M.