Trading Pollution for a Better Planet

Let's just put things simply. Suppose, all of us are allotted 3 apples for daily consumption. Some of us may not like to have 3 apples a day, others may crave more than 3. So, people with leftover apples can sell to the people who need more. Thus, an 'Apple Market' takes birth. Now, replace 'Apple' with 'Carbon' and you have got the basic idea of 'Carbon Market; vis a vis carbon emission trading.

According to UNFCCC website, emission trading, as set out in Kyoto Protocol (article 17), allows countries to sell spare emission units that were 'permitted but not used' to countries who have crossed their target. This way Greenhouse Gases, simply addressed as Carbon, became a commodity like any other, which is being traded in Carbon Market.

EU Emission Trading system created the world's first carbon market, which is among the largest ones globally. This system requires polluters to pay for their greenhouse gas emission. It also helps bring overall EU emission down while generating revenues to finance the green transition.

The emission trading system is based on a 'cap and trade' principal. The cap refers to the limit set for an entity on the total amount of GHG that can be emitted, which is reduced yearly in line with EU's climate goal. Under the system, companies must monitor and report their emissions on a yearly basis and surrender enough allowances to fully account for their annual emissions. If these requirements are not met, heavy fines are imposed. By 2023, the EU ETS has helped bring down emissions from European power and industry plants by approximately 47%, compared to 2005 levels.

The cap is expressed as 'allowances', where one allowance give right to emit 1 ton of CO2 eq GHG. These allowances can be traded in EU carbon market. The price of allowances is determined by EU carbon market. This price also determines the revenue generated from the sale of allowances. Since 2013, the EU ETS has raised over EUR 175 billion. The EU ETS revenue primarily flows to national budgets and Member States must use it to support investments in clean energy transition (renewables, energy efficiency and low carbon technology etc.) that help reduce emissions and, with this, companies’ carbon costs.

The number of emissions trading systems around the world is increasing. Besides the EU emissions trading system (EU ETS), national or sub-national systems are already operating or under development in Canada, China, Japan, New Zealand, South Korea, Switzerland and the United States.

Carbon emission trading system can play a crucial role in global climate change scenario by encouraging emission reduction, supporting climate goals, promoting low carbon innovation and investment, driving corporate responsibility, enhancing transparency and boosting sustainable development. Overall, the carbon market is a vital tool for catalyzing climate action, aligning economic growth with sustainability and supporting global movement to limit temperature rise and mitigate worst impacts of climate change.

(Sources: UNFCCC and EU ETS website)

Md Farhan Shahrior

Assistant Consultant

EQMS Consulting Limited