In December of 2015, representatives from virtually every nation gathered in Paris for the 21st Conference of the Parties, better known as COP21. While the conference didn’t fully resolve the steps needed to address the issue of climate change, the signatures from countries throughout the globe symbolized the emergence of a worldwide commitment to climate action.
Officially, COP21’s stated goal was to balance carbon emissions by the latter half of the century. But while the related objectives often target 2030, 2050 or beyond, they will only be realized by making changes today.
One of the most direct ways governments can reduce emissions is through the growing emergence of carbon markets. A carbon market essentially places a price on the emitting of carbon in a way that allows less carbon-intensive activity to become economically beneficial. As we approach a point where nearly half the world’s population lives in jurisdictions with active carbon markets, carbon reduction has moved beyond the realm of politics and science, and into the economics of supply and demand.
How Carbon Markets Work
Coal has traditionally proven to be a cost-effective means of generating electric power. However, it also emits a great deal of carbon compared to alternative sources. In an area where a carbon market exists, organizations are required to purchase permits to release a certain volume of emissions. And that can make other sources of energy more cost effective. It may be beneficial to convert to a fully renewable option such as wind or solar, or it could mean a switch to a less carbon-intensive option such as natural gas, which generally requires only half the permits of comparable coal generation.
Depending on the framework of the particular market, a heavy user of coal not only has to pay more to acquire carbon permits, they may also have to purchase excess permits allotted to their renewable-focused competitors. Carbon permits not only mean added costs for emissions; they can also represent a revenue opportunity for those ahead of the climate curve.
What’s more, carbon permits have no inherent “supply,” so the relevant governing body can alter the volume of permits to reflect the real-world energy market. As a result, for countries that have carbon targets in place, it is not a matter of if these markets will impact the supply of energy, but when. The short answer: It’s already happening.
Emergence and Impact of Carbon Markets
From the original framework of the 1997 UN Kyoto Protocol, a number of global carbon markets have emerged and adapted to meet the environmental challenges of the 21st century. While carbon markets are still in their infancy, they occupy an increasingly larger space in the global marketplace. By the beginning of 2015 the world boasted 17 separate emissions trading systems (ETS), which covered 35 countries, 13 states and provinces, and a number of major cities throughout the world. Even more impressively, areas participating in an ETS in 2015 accounted for more than 40 percent of the overall global gross domestic product (GDP). At current projections, that number is set to grow to nearly 50 percent of the world’s GDP over the next year.
Until recently, Europe largely overshadowed other parts of the world when it came to carbon markets. These markets, however, continue to grow around the world. Today, they have become an important component of economies that would have seemed unlikely adopters not long ago.
China, the world’s leading emerging market and heaviest user of coal, is in the process of converting the existing carbon markets of its largest cities into a nationwide framework. In crude-rich Kazakhstan, carbon markets are viewed as a way to prepare the country’s delicate economy for a future that will likely demand less oil. Furthermore, cities, states and nations with quite different backgrounds are finding common ground on carbon trading, as Brazil, Russia, Thailand and others all look to adopt policies of their own.
In the United States, one of the potential impacts of the Clean Power Plan is the growth of carbon markets. This could mean an extension of the Regional Greenhouse Gas Initiative (RGGI), which operates as a multi-state market in the Northeastern U.S. For states considering joining this coalition, the impacts of carbon markets and RGGI in particular are already apparent. In 2012, RGGI states reduced the emission of greenhouse gases by 40 percent from 2005 levels, even as the economy of those states expanded by 7 percent.
A New View of Supply and Demand
Broadly speaking, the ongoing expansion of carbon markets means looking at the traditional supply and demand picture of energy commodities is no longer sufficient. Carbon markets are specifically designed to reshape the market’s balance and change the supply of energy.
Companies that don’t adapt may be looking at considerably higher energy costs. However, for others, the advent of carbon markets will represent an opportunity in a world in which renewable generation is both economically and altruistically beneficial.
This represents a unique, market-driven approach to achieving the world’s carbon-reduction goals. As a result, renewables and cleantech are redefining their role in the economics of energy. By taking a more critical look at supply and enacting policies to govern harmful emissions, companies and nations alike will be able to turn their long-term sustainability targets into reality.
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Published Jul 22, 2016 6pm EDT / 3pm PDT / 11pm BST / 12am CEST