Introduction

The global carbon credit system is an important mechanism implemented to curb greenhouse gas emissions and mitigate the effects of climate change. It establishes a common global currency for trading emissions reductions and allows nations and companies to meet their emission reduction targets in a cost-effective manner. This article explores the concept of carbon credits, the global carbon market, and issues around carbon offsetting.

What are carbon credits?

Carbon credits represent one tonne of carbon dioxide or its equivalent in other greenhouse gases. They are issued by authorities to countries or companies that have reduced their emissions or removed carbon from the atmosphere by undertaking projects like renewable energy, energy efficiency, forestation etc. Countries and organizations are allocated emission allowances and are required to surrender an equivalent number of carbon credits to cover their annual emissions. Those who emit less than their quota can sell surplus carbon credits to those who will exceed their cap. In this way, carbon credits put a price on carbon and incentivize emissions reduction activities.

The global carbon market

The UN Framework Convention on Climate Change established an international carbon market through the Kyoto Protocol in 1997. It launched three flexible mechanisms – Clean Development Mechanism (CDM), Joint Implementation (JI), and International Global Carbon Credit Emissions Trading (IET). CDM allows emission-reduction projects in developing countries to earn certified emission reduction (CER) credits. JI enables projects between Annex I countries. And IET permits countries that have emission units to spare to sell it to those that need it. These mechanisms came together to form the global carbon market where credits generated can be traded between participating countries.

Currently, the two biggest carbon are the European Union Emissions Trading Scheme (EU ETS) and China’s national emissions trading scheme. They collectively account for over 80% of global volume and value of the carbon market. Other notable regional schemes include the Western Climate Initiative in North America and the emerging markets in South Korea and elsewhere. The objective of linking these carbon pricing initiatives is to have a truly global scale of emissions trading in the future.

Role of carbon offsetting

Carbon offsetting allows individuals and companies to counterbalance emissions from their activities like flights, electricity use etc. by financially supporting emission reduction projects elsewhere. For every tonne offset, carbon credits are retired or cancelled permanently so they cannot be used again. Although offsetting does not directly reduce one’s own emissions, it helps lower global greenhouse gases.

However, carbon offsetting is a controversial subject due to concerns around additionality, double-counting, and whether offset projects really achieve verified reductions. While some offsets may help drive low-carbon solutions like renewable energy access in developing nations, others can undermine emission-cutting efforts if not properly regulated and monitored. Governments and market bodies are implementing robust quality assurance standards to enhance the credibility of offsets. Still, offsetting should only be an interim step until deep decarbonization is achieved within an organization or country.

Challenges around carbon pricing

While carbon markets have been effective in lowering abatement costs for capped entities, the overall mitigation impact has been relatively small. Carbon prices globally have remained low and unstable, far below levels experts recommend. Political challenges have stalled climate progress and weakened carbon pricing ambitions in some key regions. The exit of the United States from the Paris Agreement has reduced confidence in tackling climate change cooperatively among nations.

Design flaws have also undermined effectiveness. Most schemes distribute too many free permits in early phases leading to surplus. Price containment mechanisms like price floors and ceilings reduce certainty for long-term investors. Discrepancies in carbon values between linked initiatives hamper environmental integrity. Technical issues in baselines and measuring real reductions undermine credibility over time. Political resistance against raising prices curtails ambition in emission targets. Stronger carbon pricing leadership is needed globally to harness market forces at scale for climate action.

The future of carbon 

Looking ahead, linking heterogeneous carbon pricing systems may not achieve meaningful coordination at the speed required. Experts argue that overcoming fragmentation calls for an international governance structure within the UNFCCC. This may establish a minimum global carbon price, set common baseline and accounting rules, and impose carbon border adjustments on non-participants to prevent leakage. However, such interventions can impede sovereignty and political appetite is low. An alternative approach piloting ‘carbon clubs’ among like-minded groups may be easier to establish and still drive collective mitigation efforts.

As climate change accelerates, carbon markets will face pressure to deliver steeper emissions cuts. Non-state actors are developing private/ blockchain-based carbon markets with social attributes and outside direct government control. These innovative platforms and the use of smart contracts could help scale up finance for climate solutions. Overall, an effective solution combining national carbon pricing, international cooperation, and private innovation will be vital to realize carbon trading’s potential in tackling the global climate crisis. Close regulation and supervision is equally important to uphold environmental and social integrity throughout this process of decarbonization.

The global carbon has helped demonstrate that mitigating climate change can be compatible with economic growth. Yet, much work remains to strengthen schemes, align policies, and scale up ambition among nations. Carbon pricing alone will not suffice – it must be paired with regulations, public investments, technology development, behavioral changes and broader sustainability transitions. By harnessing market forces constructively, supporting climate action financially, and spurring low-carbon innovation globally – carbon trading can make an indispensable contribution. With the right refinement and collective political will, it may serve as a major pillar of the global climate solution.

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1. Source: Coherent Market Insights, Public sources, Desk research
2. We have leveraged AI tools to mine information and compile it