The heatwave that terrorized Canada and the United States in late June, led to a record-shattering rise in temperatures. Lytton, a small village in southern British Columbia, engulfed in a wildfire, recorded a temperature of 121.3F — the highest, not just in its, but Canada’s history.
The Pacific heatwave led to several hundred casualties. Later, climate scientists discovered that the mass-casualty event would have been “virtually impossible” without climate change.
The causes of climate change are not hard to grasp; when we use energy sources like coal and natural gas, the combustion releases carbon dioxide (CO2) and other gases that act as a blanket, trapping the earth’s heat, warming it up like a greenhouse.
That’s it. All we need to do to slow down the unnatural rate at which the planet’s temperature is climbing, is reduce the emission of greenhouse gases.
Energy production and industries are the largest contributors to greenhouse gases. Now, corporations and industries who rely on, say, coal and natural gas, to function, could become responsible, instead, relying on “green” energy to cut down on emissions. However, intrinsic motivation is much harder to cultivate, let alone sustain. It has been consistently demonstrated that a system of reward-and-punishment is more effective in bringing about behavioral change.
That’s why we came up with carbon markets.
What are carbon markets?
As the name suggests, a carbon market is a marketplace for carbon.
A carbon market is a system in which corporations are assigned a limit or “cap” on the greenhouse gases they are allowed to emit. The cap is certain finite units of emissions determined by analyzing several factors, like equipment, facilities, and energy consumption.
Corporations that generate emissions lower than the allowance can sell the extra units to corporations that have exceeded it and hence need more.
In other words, by putting a price on carbon, a carbon market incentivizes the efficient consumption of energy. It incentivizes innovations that enable corporations to grow sustainably.
More than 45 countries have adopted the scheme, including the United States, Canada, Australia, New Zealand, Ukraine, the United Kingdom, Switzerland, and Sweden.
Now, China has finally launched its first national emissions trading scheme — the world’s biggest.
Read more: Is China greenwashing its ESG Disclosures?
China launches long-awaited national carbon emission trading scheme (ETS)
There is good news and bad news.
The good news is, China’s initiative could be monumental for achieving global climate goals. After all, China is the world’s largest emitter of greenhouse emissions, having contributed 27% of the world’s total in 2019 (Nature Publishing).
Much like the EU, China has also launched a cap-and-trade scheme, wherein China’s corporations are assigned a fixed allowance. Spared units can be traded with corporations in demand of them, thereby solving the climate crisis cost-effectively.
However, there is one key difference.
While the EU’s carbon market has a cap on absolute emissions, China’s carbon market has a cap on the intensity of emissions: the number of emissions per unit of energy generated.
To give you an example, the EU’s diet restricts its members’ calories to an absolute value, no matter which pastries they consume and how many. China, meanwhile, allows for unlimited calories, as long as each pastry does not contribute to more than 500 calories per 100 grams.
Read more: How Data Science Can Help in Tackling the Climate Change Crisis
Now, the bad news.
China is walking quite the tightrope.
To achieve its ambitious goal of net-zero emissions by 2060, China began to dabble in carbon markets as long as 8 years ago, in 2013, when it launched 7 local schemes in major cities, like Beijing and Shanghai.
Only in February did the superpower finalize the rules and regulations for its latest, nationwide carbon market, which was officially opened for trading on July 16.
However, unlike the EU, whose Green Deal has committed its members to achieve the same goal by 2050, China’s scheme is limited in its scope. At least for now.
Currently, the plan is only applicable to plants relying on oil and gas-fired energy. The scope will expand, covering construction, oil and chemical industries, and other greenhouses emitters, in the coming years.
But even then, researchers argue that China’s initiative is unlikely to do any good. The caps are high, units are cheap, and penalties are not sufficiently severe.
Then, there is the fact that China is among the world’s fastest-growing economies. While it is claiming that its carbon market’s restrictions will become increasingly tightened, further increasing the incentives for efficiency, one must wonder how it will cope with the rising consumption of power.
And what about corruption?
The Kyoto Protocol, Paris Agreement, and challenges to carbon markets
Carbon markets can also be launched on a global scale. In fact, a report by the Environmental Defense Fund (EDF) found that if the costs saved by an international market “were re-invested into greater emissions reductions…the cumulative emissions reductions over the period 2020-2035 would nearly double the emissions reductions that would be achieved using only current policies.”
Actually, we already have one.
In 1997, the United Nations launched the Kyoto Protocol, an international carbon market in which only developed nations would participate.
However, the market did not last long. The United States left in 2001, while the EU barred the purchase of credits in 2012. Although the protocol officially expired in 2020, it collapsed effectively years ago.
Why?
A report published in 2015 found that most projects under the protocol relied on low-quality environmental data. Instead of decreasing, emissions had actually increased by 600 million metric tonnes.
The truth is, the Kyoto Protocol failed because it lacked rigid and strict standards and transparency in data reporting. Its lax rules were exploited as loopholes by nations to escape penalties.
Even the Paris Agreement faces an identical challenge.
The Agreement’s objective is to limit the rise in global temperature to 2 degrees by the end of this century. But in the last 5 years, progress has been sluggish. In fact, an agreement has been achieved on all but one article — Article 6, the successor of the Kyoto Protocol, outlining the new standards for the international trading of emission credits.
Wary of repeating the same mistake, nations have proposed more rigid, stricter, and transparent standards bound to arrest the pace of climate change.
However, many countries have disagreed, instead proposing what others regard as “weak” standards — standards that do not stand up to robust accounting and reflect a lack of total commitment.
Even the most committed nations, knowing full well the urgency of the crisis, do not wish to settle, since “no deal is better than a bad deal.”
China could face the same fate.
Climate researchers warn that the integrity of data reporting and accurate monitoring of greenhouse emissions will be the primary challenges to China’s market.
Read more: “Greenwashing” Is Misleading ESG Investors – Understanding the Gray Areas
China, however, has great confidence in its standards. For one, they will demand extremely detailed information from corporations, outlining the type of coal they use, and how much. To bolster integrity, it, like the EU, will verify the information from independent agencies.
Seems feasible — in theory. Corporations have found ways to hide behind technical details before, and they will continue trying to do so.
But it’s not all bad. The scope might be small and allowances generous, but researchers are optimistic because the infrastructure has finally been put in place.
Slowly, but change indeed is on its way.
