The carbon market mechanisms to be implemented under Article 6 of the Paris climate deal will enable governments and companies to collaborate to achieve their climate targets. There is growing interest in these new systems but some finer details need to be agreed.
A volume-based cap should deliver a certain emissions reduction, while a cap based on intensity may allow more flexibility but could mean emissions rise. Governments often begin by offering a significant share of permits for free and later switch to auctions.
More compliance carbon markets and taxes, with rising prices, raises the risk of carbon leakage. Concessions weaken the effectiveness of the carbon price, spurring some policy makers to consider imposing a carbon tariff on imported goods.
Designing a compliance carbon program will require policymakers to take account of the impact on the developing economy and the livelihood of low-income households that tend to be most impacted by the pass-through of carbon prices onto everyday purchases.
Almost all emissions trading programs have provisions or levers that can help prevent market shocks and avoid big price fluctuations. The most common types are price restrictions on permit auctions and reserves.
More experienced offset buyers may prefer to work directly with a project developer through an over-the-counter transaction, while newer buyers will let a broker or aggregator handle it for them, which could simplify the process but be more expensive and weaken the additionality argument.
Carbon offset projects need to go through siz key steps: the project is identified and designed; it is then validated by a registry before the project is undertaken; emissions are measured, reported and verified before the offset can be issued and traded; and the last stage is retirement.
Prices for carbon offsets vary widely based on the project sector and location, together with nebulous factors that are hard to define and measure. One such driver is project “additionality” – whether decarbonization would have happened without offset revenue.
Some compliance carbon markets allow participants to use offsets to meet their emission obligations. However, many governments have imposed restrictions on these credits – for example, on the location or sector of the low-carbon project – and some have banned them entirely.
Governments planning to introduce a carbon tax or market need to take steps to bolster public acceptance. Important factors are measures to ensure fairness, the policy name and how revenue will be spent.
Most of the top corporate offset buyers are consumer-facing, demonstrating the influence of customers, and based in North America and Europe. Buyers primarily opt for offsets from avoided deforestation and energy generation projects – both types of emission-avoidance projects.
Initiatives are underway to improve the environmental rigor of voluntary carbon markets, such as the Science Based Targets initiative and the Integrity Council on Voluntary Carbon Markets. In addition, private-sector players are developing technologies to improve measurability.
The voluntary carbon markets are oversupplied, with offset issuance climbing 54% on a compound annual basis since 2018. Most have come from nature-based solutions, such as the planting of forests, or energy generation projects, like wind and solar farms.
Low-carbon project developers
Corporate credit buyers
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