Policy Solutions

Emissions Trading Systems

Photo credit: AIDER

Unless you’re a policy wonk, you probably don’t spend a lot of time discussing emissions trading systems. But they’re key to achieving the goals of the Paris Agreement.

Right now, our emissions levels put us on a dangerous trajectory of unmanageable climate change, and so 195 countries around the world have promised to reduce and eventually phase-out their emissions. Read more about the Paris Agreement here. There isn’t one catch-all way of doing this: we’re going to need a range of changes, from increasing energy efficiency to increasing the use of renewable energy – and of course, avoiding deforestation.

But we can’t do this without putting a price on carbon. And emissions trading systems are a practical way of achieving this which make this transition to a ‘zero-carbon economy’ easier and more affordable.

Why price carbon?

Putting a price on carbon is an economic tool that changes things across the board. Using fossil fuels causes damages (costs), and right now, we’re not paying for them. That’s not economically, let alone environmentally, sustainable.

It’s like operating a damaged machine without fixing it because we don’t want to pay for repairs: at some point, it’s going to completely break down, and at that point, it’s far more expensive to put back together – if it’s even possible.

And none of us want a broken planet.

So in other words, prevention is the best medicine. Paying for the carbon we use is like paying for repairs: it helps us address the damage caused by fossil fuels by making them more expensive – and therefore less attractive. Thus, their use decreases, while cleaner and more sustainable options become more valuable. We call this ‘shifting the incentive’.

Emissions trading isn’t new. Emissions trading systems were first introduced with great success to decrease emissions of two toxic pollutants, NOx and SOx, in the US, as part of the Clean Air Act Amendments of 1990. The schemes reduced emissions efficiently and air quality improved, with huge health benefits for local people.

So what is it?

In an emissions trading scheme, a limit (cap) is set on the amount of carbon that can be used in a given time, and emitters get tradeable allowances for reducing their emissions. These can be given out for free or even auctioned and sold by the government, and then they can be bought and sold by emitters, depending on what they need – which depends on whether they have a harder or easier time reducing their emissions. It’s just like you paying someone to fix your machine: you could probably do it yourself, but it would cost you a lot more time (and time is money!) compared to hiring someone with the relevant expertise.

The result of all this trading is that we find the most cost-efficient way of reducing emissions and meeting the emissions ‘cap’. So when the Kyoto Protocol (the previous climate agreement before the Paris Agreement) was negotiated in the 1990s, it took a page out of the same book, and set up an international emissions trading system to allow emissions to be reduced in the cheapest locations first. Credits from outside the system could even be imported for a limited time, to make reducing emissions even cheaper and increase the ambition for reductions – for example, over 1 billion carbon credits were imported by businesses in Europe from developing countries all around the world, with the biggest exporters being China, India and Brazil.  At one time, carbon credits were 14th on the list of exports from Brazil demonstrating the fantastic potential for innovation when a value is put on carbon pollution.

It is an obvious way of minimising the overall cost of meeting climate change goals, and carbon pricing schemes are being implemented worldwide. About 100 country commitments made as part of the Paris Agreement, representing around 58% of global emissions, are planning or considering some sort of scheme1:

emissions-trading-systems

Another way of pricing carbon is through carbon taxes. These charge a flat amount per tonne of carbon used, and so the price governs how much carbon ends up being used. Most of Europe, and parts of North America, including Canada and several of its provinces, are covered by emissions trading schemes, and some of these even exist alongside carbon taxes.

Some industries are even creating their own schemes – like the aviation industry. Airlines plan to deliver carbon neutral growth by 2020, first reducing their own carbon footprint and then buying carbon assets like the ones we bring to market.

How forest carbon links to emissions trading schemes

Forest conservation projects like ours keep threatened trees standing, and prevent the carbon in them from being lost to the atmosphere. So they generate emissions reductions, which can be bought by emitters. The graph below shows the historical average price per tonne of carbon for different types of projects; you can see that forest conservation is one of the most cost effective options. That’s how they can be used to help businesses (and governments) lower emissions for less cost.

And that’s why we say forest carbon is the most cost-effective way of meeting our climate commitments.

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At Ecosphere+

We believe that a price on carbon emissions is essential. We also know that while the economy is clearly transitioning to a lower-carbon system, it isn’t happening fast enough. Businesses (and individuals) can’t wait for governments to implement perfect climate change and carbon pricing policies before taking action. If they do, the machine will already be broken – it will be too late to prevent climate change and exponentially more expensive to fix what remains.

We work with businesses that wish to take action today to manage climate risk and shape the policies of the future by choosing to put a value on carbon emissions.

Find out more about our work here.

[1] World Bank, Ecofys, and Vivid Economics (2016), State and Trends of Carbon Pricing 2016.