MADRID – In the global fight against the climate crisis, one of the key tools is trading carbon credits, a market in which Europe is a pioneer, determining a price for emissions so that polluters pay for polluting.
This system of emissions caps and the trading of carbon credits, which will be debated at the COP25 summit in Madrid this week, creates a market for trading the right to emit CO2, with the supply being set by the public sector based on specific goals, for example those arrived at in the Paris Agreement, while demand is determined by polluters.
Supply and demand set the price, and polluters must pay with credits for emitting carbon dioxide (CO2).
Companies that need to emit CO2 above their caps must buy carbon credits from businesses that pollute less than they are allowed to and thus do not use all of their carbon credits.
A hotly debated measure to improve carbon trading systems, albeit one that has not been implemented yet, calls for setting a price for carbon that is sufficiently high to create incentives for energy industry actors and financial institutions to invest in clean technologies that could prove more profitable than polluting.
Among the fundamental issues that will be addressed at COP25 is the formulation of regulations for implementing Article 6 of the Paris Agreement on carbon markets and the cooperation mechanisms for advancing reductions in emissions.
In addition to the European emissions market, which is being used as a benchmark by others, there are national and sub-national systems operating or being developed in Canada, Japan, New Zealand, South Korea, Switzerland and the United States.
The European Union Emissions Trading System (ETS) is the world’s main market for trading carbon credits and the largest market of its kind globally.
Under the ETS, a central authority, usually a government, sells a limited number of permits to emit CO2, with supply and demand setting the price.
The International Monetary Fund (IMF) just recommended a price of 70 euros per ton of carbon in developed countries by 2030 to comply with the Paris Agreement, while the cost in Europe is currently around 25 euros per ton.
Emissions of CO2 from human activities – energy, transportation, agriculture, industry and other sources – pose a serious environmental threat since the gas produces a greenhouse effect, trapping heat in the atmosphere.
High CO2 emissions from the burning of fossil fuels raise the Earth’s temperature, leading to more frequent and intense heat waves, as well as larger forest fires and torrential rains.
Rising temperatures also cause glaciars and the Arctic ice caps to melt, raising sea levels and flooding coastal areas.
Carbon credits are a key tool in the fight against global warming and the EU ETS, which was launched in 2005, was designed to limit CO2 emissions from power plants, factories and other industrial facilities.
The ETS operates in all EU countries, as well as in Iceland, Liechtenstein and Norway, as a cornerstone in the effort to achieve carbon neutrality by the middle of this century, the goal set by European authorities.
The strategy, according to recent estimates, seems to be working.
By 2020, according to forecasts, CO2 emissions from the industries in Europe included in the carbon trading system will be 21 percent lower than in 2005 and they are projected to be 43 percent below the 2005 level in 2030.
The system currently caps the emissions of more than 11,000 large power plants and industrial facilities, as well as those of airlines operating between EU countries.
Delegates attending the COP25 summit in Madrid are expected to debate the carbon credits system and, hopefully, reach agreement on a regulatory framework.