What is carbon trading? | CNBC International

Summary

The video discusses the importance of reducing greenhouse gas emissions and the role of carbon trading in combating climate change. Carbon trading, or 'cap-and-trade,' sets emission limits and allows companies to buy or sell carbon credits, creating financial incentives to reduce their environmental impact. While the system has had successes, such as in the EU, challenges remain, including potential loopholes and inequality between developed and developing nations. The video explores global carbon markets, their growth, and their role in achieving net-zero emissions by 2050, asking viewers to weigh in on its effectiveness.

Takeaways

• 🌿 Reducing greenhouse gas emissions is essential in combating climate change.
• 💼 Carbon trading is a market-based system designed to incentivize emission reductions.
• 🌍 Carbon trading operates on a 'cap and trade' model, where emissions are capped and allowances are tradeable.
• 📈 Carbon allowances are allocated to companies based on historical emissions and can be bought or sold.
• 💰 The price of carbon credits is determined by market forces of supply and demand.
• 📉 Assigning a cost to emissions encourages businesses to find and implement cost-effective emission reduction strategies.
• 🚨 The first international carbon market under the Kyoto Protocol faced corruption and inefficiency, leading to its collapse.
• 🌐 There are various regional carbon trading markets worldwide, including the EU, Canada, and China.
• 📊 The value of global carbon markets has been growing, reaching €194 billion in 2019.
• 🔄 The EU's 'market stability reserve' mechanism adjusts carbon unit supply to stabilize prices and incentivize emission reductions.
• ♻️ Critics argue that carbon trading might allow for作弊, relocation of polluters, and distract from the need to transition away from fossil fuels.

Q & A

What is carbon trading, and how does it work?

Carbon trading is a market-based system where countries or businesses can trade carbon allowances to reduce their greenhouse gas emissions. Under this system, a cap is set on the total amount of emissions allowed, and organizations can buy or sell their allocated emissions units based on their needs.

How does carbon trading differ from voluntary carbon offsets?

Voluntary carbon offsets allow consumers to choose to balance out their carbon footprint by funding projects like reforestation. Carbon trading, on the other hand, is a legally binding scheme that caps total emissions and allows trading of emission allowances.

What is the significance of the 'cap' in cap-and-trade systems?

The 'cap' refers to the maximum limit of greenhouse gas emissions set by governments or policymakers. This cap is designed to meet environmental targets and limit the damage caused by pollution.

How is the price of carbon determined in a carbon trading system?

The price of carbon is determined by supply and demand within the market. When the supply of carbon units is capped, the price fluctuates based on the availability of alternatives to polluting, with the cost rising or falling accordingly.

What challenges have been faced in implementing carbon trading globally?

Challenges include corruption, abuse of the system, and an oversupply of carbon allowances during economic downturns. For example, the collapse of the carbon market under the Kyoto Protocol was linked to widespread abuse.

Which regions currently have active carbon trading markets?

Active carbon trading markets exist in the European Union, Canada, Japan, New Zealand, South Korea, Switzerland, the United States, and most recently, China, which launched the world’s largest market for its thermal power industry in 2021.

What is the purpose of the European Union’s 'market stability reserve' (MSR)?

The MSR was created to stabilize the price of carbon allowances by adjusting their supply in response to market fluctuations. It aims to prevent oversupply, which reduces the financial incentive for businesses to reduce emissions.

Why do some environmentalists support carbon trading?

Many environmentalists believe carbon trading is a relatively efficient way to reduce emissions, as it assigns a price to pollution and provides financial incentives for companies to find cost-effective alternatives to emitting greenhouse gases.

What concerns exist about carbon trading systems?

Critics worry that countries facing economic difficulties might cheat by setting generous emissions caps or using accounting tricks. There are also concerns about polluters relocating to countries with more lenient regulations and the risk that carbon trading distracts from the need to transition away from fossil fuels entirely.

How has carbon trading impacted emissions in the European Union?

The EU’s carbon trading system has led to a significant reduction in emissions, with the energy sector shifting from coal to natural gas power stations, which produce less CO2. In 2019, emissions fell by 8.7%, the largest decline since 2009.

Outlines

00:00

🌍 Carbon Trading: A Key Tool in Reducing Greenhouse Gas Emissions

The first paragraph explains the importance of reducing greenhouse gas emissions to combat climate change. One major approach is carbon trading, a market-based system where businesses and countries can buy and sell carbon allowances, incentivizing the reduction of emissions. The concept of 'cap and trade' is introduced, where governments set a limit on emissions and companies can trade their allocated carbon units. This system provides financial motivation for reducing emissions, allowing organizations that reduce emissions to sell their excess allowances.

05:01

💰 The Economics of Carbon Credits and Market Prices

This paragraph dives into the specifics of carbon credits, which can be traded for a price determined by supply and demand. Each credit permits the emission of one ton of carbon dioxide. The idea is to create financial incentives for companies to reduce their emissions by assigning a cost to pollution. The price fluctuates based on the availability of carbon units and companies' ability to find less polluting alternatives. This mechanism encourages companies to cut emissions in the most cost-effective way, though it has faced challenges in practical implementation.

⚖️ Challenges in Global Carbon Markets

The paragraph discusses the difficulties in implementing carbon trading globally. It references the first international carbon market under the 1997 Kyoto Protocol, which collapsed due to corruption and system abuse. Despite this, various national and regional markets exist, with notable systems in the EU, China, and the U.S. The EU’s Emission Trading System (ETS) is highlighted as the oldest and most established, with China’s thermal power sector now having the largest carbon market. The value of global carbon markets continues to grow as governments tighten environmental standards.

📉 The Role of the EU in Carbon Pricing and Emission Reductions

This section explains how the EU responded to issues of low carbon prices during the 2008 financial crisis by creating the Market Stability Reserve (MSR), allowing for the adjustment of carbon unit supply. This move helped increase the price of carbon and led to a shift in energy production from coal to cleaner alternatives, contributing to an 8.7% drop in emissions in 2019. The EU's carbon market is becoming increasingly attractive to hedge funds and traders, as the price of carbon is expected to rise over time, making carbon allowances a potential investment.

😷 Carbon Markets and the COVID-19 Pandemic

The paragraph covers the impact of the COVID-19 pandemic on carbon markets, noting that the initial slowdown in economic activity led to an oversupply of carbon allowances, but prices have since recovered. Concerns remain over potential loopholes that heavy emitters could exploit. The 2015 Paris Climate Agreement commits all signatory countries to set carbon emission targets, and if implemented effectively, carbon trading could significantly reduce global emissions. However, critics worry that some countries may cheat by setting generous caps or using accounting tricks to overstate reductions.

🏭 Challenges Facing Developing Nations in Carbon Markets

This paragraph highlights the concerns regarding the role of developing countries in carbon trading. While wealthier nations can invest in low-carbon technologies, poorer countries may struggle to transition away from fossil fuels. Additionally, the focus on redistributing pollution, rather than reducing it overall, is criticized by climate activists. Despite these challenges, the growing popularity of cap-and-trade schemes is driving emission reductions worldwide, with the EU's carbon trading system serving as a model for other nations to follow.

🌐 The Future of Global Carbon Markets

In the final section, the future growth of global carbon markets is explored. With China’s new carbon market and the U.S. rejoining the Paris Climate Agreement, the size and significance of carbon trading are set to expand. The increasing price of carbon allowances is pushing companies to consider their environmental impact and reduce emissions. While carbon trading is not without its flaws, it remains a powerful tool in the fight against climate change, especially as more countries aim for net-zero emissions by 2050.

🗣️ Your Thoughts on Carbon Trading

The closing remarks invite viewers to share their opinions on the effectiveness of carbon trading as a solution to climate change. The video encourages engagement by asking viewers to comment on whether they believe carbon trading is a viable approach or if there are better alternatives to address the climate crisis.

Keywords

💡Greenhouse gas emissions

Greenhouse gas emissions, like carbon dioxide (CO2), are gases released into the atmosphere that trap heat and contribute to the greenhouse effect, leading to climate change. In the video, the reduction of these emissions is emphasized as crucial in combating global warming, with carbon trading presented as one potential solution.

💡Carbon trading

Carbon trading is a market-based system aimed at reducing greenhouse gas emissions by allowing businesses and governments to trade carbon allowances. Each allowance permits the emission of a certain amount of carbon dioxide. The video describes this as a method to provide economic incentives for reducing emissions by making companies pay for the right to pollute, creating a financial motive to decrease their environmental footprint.

💡Cap-and-trade

Cap-and-trade refers to a system where a government sets a cap on the total level of greenhouse gas emissions allowed and allocates carbon allowances to companies. These allowances can be traded if one company emits less than its share, while another may need more. The video presents this system as a legally binding approach to regulating and reducing emissions.

💡Carbon allowance

A carbon allowance is a permit that allows a company or organization to emit a certain amount of carbon dioxide. In the video, it’s explained that companies are allocated these allowances based on their historical emissions and can trade them on a secondary market, offering an incentive to reduce emissions and sell excess allowances.

💡Carbon credit

A carbon credit represents the right to emit one ton of carbon dioxide. In the video, the price of a credit is determined by supply and demand within the carbon trading market, and companies purchase credits if they exceed their emissions cap or sell them if they are below their limit.

💡Market stability reserve (MSR)

The Market Stability Reserve (MSR) is a mechanism introduced by the European Union to regulate the supply of carbon allowances in response to economic fluctuations. The video mentions this reserve was created after the 2008 financial crisis to address the oversupply of carbon units, which led to lower prices and reduced incentives for companies to cut emissions.

💡Kyoto Protocol

The Kyoto Protocol was an international agreement signed in 1997 under the United Nations, aiming to reduce global greenhouse gas emissions through mechanisms like carbon trading. The video highlights that this early carbon market failed due to corruption and exploitation, leading to an increase in emissions instead of a reduction.

💡Paris Climate Agreement

The Paris Climate Agreement is a global treaty signed in 2015, committing countries to set emission reduction targets. The video contrasts this with the Kyoto Protocol, noting that the Paris Agreement includes all countries, not just developed ones, and if properly implemented, could greatly reduce emissions worldwide by 2035.

💡Emission trading systems (ETS)

Emission Trading Systems (ETS) are frameworks where companies buy and sell allowances for greenhouse gas emissions under a cap-and-trade model. The video references various national and regional ETSs, including the European Union’s Emission Trading System, which is one of the largest and most established markets globally.

💡Net-zero carbon emissions

Net-zero carbon emissions refer to balancing the amount of carbon dioxide emitted with an equivalent amount being removed from the atmosphere. The video mentions the global push for countries and companies to reach net-zero emissions by 2050 as a key goal set by the United Nations to mitigate climate change.

Highlights

Reducing greenhouse gas emissions, such as carbon dioxide, is crucial in combating climate change.

Carbon trading is a market-based system providing economic incentives for reducing environmental footprints.

Carbon trading is a legally binding 'cap-and-trade' system that limits total emissions and allows organizations to trade their allowances.

Organizations with large carbon footprints are allocated allowances, and they can sell excess units if they reduce their emissions.

A carbon credit allows for the emission of pollutants equivalent to one ton of carbon dioxide, with prices influenced by supply and demand.

Carbon trading creates financial incentives for firms to reduce emissions while lowering overall reduction costs.

The first international carbon market was created under the UN's 1997 Kyoto Protocol, but it collapsed due to corruption and system abuse.

Several national and regional carbon trading markets operate today, including the European Union's Emission Trading System, launched in 2005.

China launched the world's largest carbon market in 2021 for its thermal power industry, which accounts for 40% of the nation's emissions.

The global value of carbon markets reached €194 billion in 2019, marking a 34% increase and reflecting the growing importance of emissions trading.

Cap-and-trade systems help tackle environmental problems, as shown by the reduction of sulfur dioxide emissions in the US, which helped combat acid rain.

The European Union's 'market stability reserve' was introduced to manage carbon supply and stabilize prices, leading to a tripling in carbon unit prices.

In 2019, emissions in the EU fell by 8.7%, the largest decline since 2009, due to shifts from coal to cleaner energy sources.

There are concerns about loopholes in carbon trading, such as nations overstating their reductions or companies relocating to avoid caps.

Despite criticisms, the EU's carbon trading scheme is seen as a model, and the global carbon market is poised to grow with China's and the US's involvement.

Transcripts

Reducing greenhouse gas emissions, like carbon dioxide,

is a crucial component in the fight against climate change.

One way governments are trying to reduce their emissions is through carbon trading, a market-based

system that aims to provide the economic incentives for countries and businesses

to reduce their environmental footprint.

Almost every activity from travel to farming and even watching this video leads to the

emission of gases such as carbon dioxide, contributing to the greenhouse effect

responsible for climate change.

Unlike voluntary offsets, where consumers can choose to pay a company to balance out

their carbon footprint, such as funding reforestation projects which absorb CO2, carbon trading

is a legally binding scheme that caps total emissions and allows organizations to trade

their allocation, hence the term “cap and trade."

All “cap-and-trade" systems have emissions limits calculated by governments and policymakers,

which are compatible with their target of limiting environmental damage.

Carbon allowances, or units, totalling up to this maximum are then allocated to companies

and can be traded on a market.

Each year, organizations with a large carbon footprint are allocated an allowance proportionate

to their historical emissions, which can then be bought and sold on a secondary market.

If, for example, a company knows they have gone over their allowance, then they will

need to buy more carbon units from their carbon market.

But if they implemented measures to reduce their emissions, they can sell any excess

units on the market.

A credit, which can start from $12 or run as high as $125, allows for the emission of

pollutants equivalent to one ton of carbon dioxide.

The price of carbon is determined by supply and demand.

Supply of units is capped at a level deemed acceptable and their cost will rise and fall

depending on whether firms find alternatives to polluting.

By assigning a price to damaging activity, the system provides a financial incentive

for firms to reduce emissions, whilst lowering the overall cost of these reductions as the

cheapest improvements are made first.

Although carbon trading seems great in theory, it hasn’t been easy to put into practice.

The first international carbon market was set up under the

UN’s 1997 Kyoto Protocol on Climate Change.

However, following widespread reports of corruption and abuse of the system, the market collapsed.

A report in 2015 found that an estimated 80% of sustainable projects under the trading

scheme were questionable, enabling emissions to increase by roughly 600 million metric tons.

Since then, there hasn’t been a consensus on the best way to implement

a cap-and-trade scheme globally.

However, there are a number of emission trading markets around the world

at both national and regional levels.

The oldest active carbon market is the European Union’s Emission Trading System, which

launched in 2005, while other schemes are operating in Canada, Japan, New Zealand, South

Korea, Switzerland and the United States. At the start of 2021, China launched the world’s

largest carbon market for its thermal power industry.

The sector accounts for 40% of China’s emissions, equivalent to double the emissions covered

by the EU’s carbon market.

As governments tightened environmental standards, the total value of global carbon markets grew

34% in 2019, reaching €194 billion.

It’s the third consecutive year of record growth and values these emissions nearly five

times their worth in 2017.

And the number of cap-and-trade markets is likely to increase as many countries, cities

and companies worldwide try to meet their ambitious pledge of net-zero carbon emissions

by 2050 — a target set by the United Nations.

Cap-and-trade systems have been successful in tackling environmental problems in the

past, including one covering sulphur dioxide emissions, which helped reduce acid rain in

the U.S. Compared to direct regulations or taxes, carbon trading doesn’t require as

much government intervention in the economy, leaving businesses to find their solutions.

And as long as the cost of emitting greenhouse gases is high enough to encourage these alternatives,

many environmentalists believe it could be a relatively straightforward and efficient

method to drive decarbonization.

However, an oversupply of carbon allowances during the 2008 financial crisis saw the price

of polluting fall in the EU’s trading system, reducing the incentive

for businesses to change their behaviour.

In response, the EU created the ‘market stability reserve,’ or MSR, a decade later,

which gives the European Commission the ability to tighten or loosen the supply of carbon units.

As a result, their price tripled from 8 euros per tonne of CO2

to around 25 euros per tonne of CO2 over a year.

In turn, the energy sector moved output away from coal power stations to cleaner, natural

gas powered-electricity production that produces less CO2.

In 2019, emissions fell by 8.7%, the largest decline since 2009.

The EU’s carbon market has also caught the eye of hedge funds and traders.

Whereas OPEC controls a third of the global oil supply, the EU regulates all carbon allowances

within its emission trading system.

And with the EU’s long-term aim of gradually increasing the price of carbon units, these

are seen as a popular long-term investment.

While the COVID-19 pandemic led to a glut of carbon allowances as activity across the

economy fell, prices are now back up above pre-COVID levels.

However, there are concerns that heavy emitters may find loopholes in carbon trading systems.

Unlike the earlier Kyoto Protocol agreement, the 2015 Paris Climate Agreement commits all

signatories, not just the most developed economies, to impose carbon emission targets.

If implemented successfully, analysts believe that international emissions trading could

cut global emissions by around 60% to 80% by 2035.

Critics of carbon trading worry that countries facing economic difficulties might be tempted

to cheat, either by making their overall emissions cap too generous,

or using accounting tricks to overstate reductions.

For example, a nation might reduce its carbon emissions by building a wind farm to replace

a coal-fired power station.

This would free up a portion of its carbon allowance, which could be sold to another

country but might still count as a reduction in the first country’s emissions, even though

overall output hasn’t changed.

There are also fears that major polluters might relocate across borders to avoid signing

up for a cap-and-trade scheme, or finding a more lenient jurisdiction.

Another criticism of carbon markets is that developed countries, which have done most

of the polluting to date, are able to invest in low-carbon technology and have reoriented

their economies to less carbon-intensive activities, unlike poorer nations.

Climate campaigners also argue that too much focus on merely redistributing pollution obscures

the fundamental need for all countries to transition away from fossil fuels in the near

future to avoid severe and irreversible damage to the environment.

The increasing popularity of cap-and-trade schemes, and the rising price of carbon allowances

are forcing companies to consider their effect on the climate

and has led to a reduction in emissions.

Although imperfect, the EU’s carbon trading scheme is a model for other economies to emulate.

With the creation of the biggest carbon market in China and the US’s return to the Paris

Climate Agreement, the global carbon market’s size and importance look set to grow.

Hi guys, thanks for watching our video.

So do you think carbon trading is an effective way to tackle climate change

or is there a better way?

Comment below the video to let us know and we’ll see you next time.