CO2, emissions, decarbonization

Demand for carbon trading grows as push to reduce emissions expands

Despite reduced emissions due to the COVID-19 pandemic, global carbon markets enjoyed record growth in 2020 and trading looks set for another record year in 2021.

Despite reduced emissions due to the COVID-19 pandemic, global carbon markets enjoyed record growth in 2020 and trading looks set for another record year in 2021.

Experts say that year-on-year growth in carbon trading markets last year is a sign that companies and countries are finally taking their environmental responsibilities more seriously.

As the EU enacts ambitious new emissions targets and new markets open in China and the UK, carbon trading looks set to become a mainstay of the governmental response to climate change.

Carbon emission and rising temperatures

A rise in global temperature of just 1.5°C above pre-industrial levels could be disastrous for the planet and its people. Experts agree that limiting carbon emissions and other greenhouse gases is key to avoiding the potentially apocalyptic scenario of soaring temperatures and rising sea levels.

In the 2015 Paris Agreement, almost 200 nations agreed on a global goal of cutting greenhouse gas emissions by 50% by 2030. In 2019, the European Union announced a further pledge of reaching net-zero emissions by 2050 under its Green Deal package. The target was written into law by the EU parliament in 2021.     

Carbon trading has a crucial role to play in meeting these targets and those set out by other governments. Carbon trading is a market-based system in which a government sets a limit on the amount of carbon emissions companies are allowed to produce over a fixed period and gives them certain allowance of emissions credits to use. Companies can buy and sell these emissions credits depending on their needs.

In the EU, carbon prices fell sharply in Q1 2020 with the arrival of COVID-19 on the continent. But the dip was short-lived, and the market went on to record highs of EUR 33 per ton by year-end, despite lower emissions. The year also saw trading of carbon emission permits valued at an all-time peak of some EUR 22bn globally.

This growth is due to a convergence of factors, says Ian Bailey, a professor of environmental politics at the University of Plymouth: ”Foremost amongst these are the growing number of countries that have committed to net-zero – the UK and EU included – and the process of updating of Nationally Determined Contributions under the Paris Agreement process in the context of the Biden administration's return of the US to the international climate action fold.”

“Alongside this, political declarations about ‘building back better,’ the climate emergency movement and setting of carbon budgets as part of national climate change acts have all contributed to a sense that policy is firmly headed towards net zero. Carbon budgets send a signal that emissions caps in carbon markets are coming down, which is also being picked up in business investment.”

More talk and more action

Andrei Marcu is the founder and executive director of the European Roundtable on Climate Change and Sustainable Transition (ERCST). He agrees that the more conventional energy policy emerging under Joe Biden has had a positive influence on global markets.

“Whilst this is not an unconstrained administration, it’s incomparable to what we used to have in the White House. We’ve definitely seen some levels of relaxation because the US is no longer at war with the G7 like it was under Donald Trump,” Marcu says.

A US commitment at the federal level, although unlikely, would provide a further boost, he adds. “The consensus seems to be that there are no plans for federal carbon pricing in the US. However, the symbol of having a carbon price at the federal level would be an extremely powerful one. You would have a liquid market that is commoditised and, as such, it would gain a lot of traction and become much more widespread.”  

Marcu says more airtime for environmental issues is increasing pressure for governments and corporations to act.

“This has played a part in building the expectation of scarcity and attracting high volumes of speculative (spec) money into global schemes. While spec money sounds like a dirty word, it isn’t necessarily so in this case,” he says. “Many trading companies aren’t actually trading but just looking at the percentages and calculating the risks. They see growth in the market and want to join in.”

Trading for the future

China has set its sights on 2060 as its target date to reach carbon net-zero. The first Chinese emissions market opened in February 2021 and is already the largest power sector market globally, covering some 2,000 power plants and 30% of the country’s total emissions. These 2,000 power plants alone are responsible for more than 4bn tonnes of CO2 emissions. As the world’s largest polluter, China’s market will be integral to global decarbonisation efforts.

The UK also launched a trading market this year to replace its participation in the EU’s ETS following Brexit. The market will cover 155 mega tonnes of emissions in its first year.

“Governments are now recognising that action on climate change needs to be more urgent and decisive,” says Ian Bailey. “The carbon budget process will provide a decent anchor for the continued growth of carbon prices and, in an expanding number of countries, climate change commissions and committees are making long-term projections on carbon prices. This is again sending signals to business that, in turn, affects investment choices and supply and demand for allowances.”

“Trading has become integral to the drive for carbon neutrality,” concludes Marcu. 

“It is not the alpha and omega of the movement, but it has become the bedrock,” he says. “The promise of carbon trading is now very real; it has become central to the idea of decarbonisation and an accepted part of the landscape.”

Written by
Tom Rodgers