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What Are Carbon Exchanges?

Recently the Intergovernmental Panel on Climate Change (IPCC) published a brand new report card of the progress made by humanity towards having a halt to climate changes. The bad news is that greenhouse gas (GHG) emissions are rising across all major industries across the globe, but at a slower rate. The good news is that renewable energy is now affordable – less expensive than oil, coal, and gas.

Although there has been some improvement, planet faces a huge task. Scientists warn that warming of 2 degrees Celsius will be surpassed in the 21st century unless we make massive reductions in greenhouse gas emissions in the near future.

Effective action requires concerted and adequate investment, recognizing that the cost of not doing anything will be greater. Countries in developing countries will require at least 6 trillion dollars in 2030 to fund not less than the half of their climate change targets (as as stated as part of the Nationally Determined Contributions (also known as NDCs).

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The most recent IPCC report has found that every country is falling far short of the goal, with financial flows ranging from three to six times less than the levels required in 2030. There are even more stark differences in certain regions around the world.

How do we accelerate and finance the change needed to solve our climate crises? A lot of countries are looking at carbon markets as a part of the solution.

Are carbon market markets a good thing?

In simple terms, carbon markets refer to trading platforms where carbon credits can be sold and purchased.

One carbon credit tradable equals one ton of CO2 or an equivalent of a greenhouse gas that is reduced by sequestration or avoided.

What types of carbon markets are there?

There are generally two kinds that exist in carbon market: voluntary and compliance.

Markets for compliance are developed due to any national, regional or international policy or regulation.

Voluntary carbon markets, both national and international are the issue purchasing or selling carbon credit on a basis of voluntary.

The current supply of free carbon credits is mostly from private companies who design carbon projects or government agencies that create programs that are certified by carbon standards that result in emission reductions and/or removals.

Demand is driven by private individuals who want to offset their carbon footprints, businesses that have sustainability goals for their corporate operations as well as other players who want to exchange credits for a greater price in order to earn a profit.

Are there any examples?

One kind of compliance market that a lot of people have heard of is the emissions trading system (ETS). They operate on a “cap-and-trade” principle that regulates businesses or even nations, as in the EU’s ETS are given emission or pollution permits or allowances by government officials (which total to the maximum amount (or capped) amount). Polluters who exceed their permissible emission levels must purchase permits from other companies with permits to purchase (i.e. trade).

The European Union launched the world’s first international ETS in 2005. In the year 2005, China launched the world’s largest ETS that is estimated to be covering around one-seventh carbon emissions worldwide resulting from burning of fossil fuels. A number of subnational and national ETS are in operation or in the process of being developed.