Carbon trading has been around for decades, with the EU carbon tax first adopted in 1991. However, there have been questions raised as to whether it is an effective way of reducing carbon emissions or if it is just a way for companies to continue polluting without any consequences, while still profiting.

At first look it may seem that creating markets where companies are able to profit from selling carbon allowances or permits is unwise as global warming has largely risen from capitalist production, however this creates a financial incentive for companies to reduce emissions.

The Intergovernmental Panel on Climate Change (IPCC) was created in 1988; a group of scientists that advises governments and informs them of the scientific understanding behind the climate crisis. They proposed an emissions trading market in order to combat climate change.

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Emissions Trading Systems 

Carbon trading is already happening across the world in Europe and the US. The EU’s emissions trading systems (ETS) is the world’s first and largest international carbon market, operating in all EU countries and covering approximately 40% of atmospheric greenhouse gas (GHG) production in the EU. 

It uses a cap and trade system; limits or ‘caps’ are imposed on the amount of GHG that can be produced from power stations and industrial plants, as well as aviation. Companies either receive or purchase allowances which would ideally cover their estimated carbon emissions for a whole year, and this essentially gives them the right to pollute to a certain extent. One allowance allows for the emission of 1 tonne of CO2. Companies are then able to trade allowances on the international market– they can buy allowances if they need more, and this can either be from other companies who are selling allowances they no longer require, or auctions held by Member States . This method of trading values cost-efficiency and relies on cutting emissions where it costs the least to do so.

According to the EU, the ETS has been effective in reducing GHG emissions. The EU’s Annual Carbon Market report indicates that total emissions from stationary installations– the emissions covered from power and heat generation- declined by 4.1% between 2017 and 2018, and since it’s introduction in 2005, total emissions have fallen by 29%. Power plant installations have had the biggest reduction in emissions– 5.9% between 2017 and 2018 which has largely been due to the abandoning of coal by many countries.

Downfalls of Carbon Trading

Despite this, the ETS has failed to hold some polluting industries accountable for their emissions. A certain number of what are called ‘free allowances’ are given to industries at risk of relocating production outside the EU, which would create ‘carbon leakage’. These industries receive 100% of their allowances for free, and this is set to continue beyond 2020. 

Free allowances shift the responsibility away from the industries and whilst carbon leakage is a very real problem that may potentially increase carbon emissions elsewhere outside of the EU, there has also been no substantive evidence to support that this would be because of the ETS. In fact, this idea only benefits big polluting companies by using ‘competitiveness’ as a tool for them to continue polluting without any consequences. Some companies have resorted to using offset permits, which are tradeable in the ETS, by reducing emissions elsewhere in developing countries, by investing in reforestation programmes, for example, defeating the purpose of the cap and trade, since the aim is to reduce emissions on a global scale.

The ETS has given companies the opportunity to make profit by passing off the cost of purchasing additional permits on to the customers. For example, German company RWE made 1.8 billion euros in windfall profits between 2005 and 2006 by charging their customers for permits which they had received for free. Utility prices rose from 30 to 47 euros per mega-watthour.

Attention has shifted to the cost efficiency of the ETS scheme instead of its effectiveness, and the truth is, the ETS scheme is ineffective in actually reducing GHG emissions. The scheme alludes to the idea that action is being taken but the reality is that GHG emissions are increasing at a far greater rate than predicted. Unlike other industries that witnessed a decline in ETS emissions over the years, ETS emissions in aviation actually increased between 2017 and 2018 by 4%.

As important as individual lifestyle changes are, the biggest changes must come from governments and companies. Draconian measures will be needed if we are to reach the Paris Agreement target. 

It is estimated that over 40 governments across the globe have begun using some form of cap and trade system or carbon taxation in order to reduce emissions. Australia, China, the US state, California, New Zealand, South Korea and the Canadian province, Quebec have all imposed a cap and trade system. Canada shows to be the most driven towards reducing carbon emissions effectively and has imposed a carbon taxation on coal, oil and gas, starting at $15 per ton of CO2. The majority of the revenue is then refunded to taxpayers. A carbon tax would offer stable carbon prices and a cost-effective and efficient form of reducing carbon emissions in order to mitigate global warming. 

Featured image by: Sebastian Horndasch