COP26's impact on carbon trading.
Carbon trading was established in 1991, with the aim to incentivise countries to cut back on their carbon emissions. In cutting back on their emission they would have left over permits to sell - the incentive. While some argue the market system is a cost-effective solution to the climate crisis and it incentivises innovation, others have criticised that it provides an excuse for businesses to continue polluting without consequences.
Currently, there are different trading systems across the world, with the EU’s emission trading system (ETS) being one of the largest and most mature carbon markets worldwide. According to the EU’s Annual Carbon Market report, the ETS has been effective in reducing GHG emissions, with total emissions from stationary installations declined by 9.1% in 2019, which is the equivalent of 152 million tonnes of CO₂. Despite this, one overarching issue is that carbon trading lacks a global framework, and carbon pricing is not fixed across all markets. A key factor holding back carbon pricing is carbon leakage, where a certain amount of ‘free allowances’ shifts the responsibility away from the industries, motivating firms to move emissions offshore.
Therefore, COP26 is seen as a ‘now-or-never’ opportunity for carbon traders and governments alike to come together for a resolution to Article 6 in the Paris Agreement that oversees the trading emission between countries. In theory, cooperation under Article 6 can bring about £180bn cost savings per year in 2030, giving stable incentives for stakeholders to adopt low-emission technology.
Written by Sharon She
References
"Report On The Functioning Of The European Carbon Market". 2020. Brussels. https://ec.europa.eu/clima/system/files/2020-11/com_2020_740_en.pdf.
"The Economic Potential Of Article 6 Of The Paris Agreement And Implementation Challenges". 2019. International Emissions Trading Association (IETA). https://www.ieta.org/resources/International_WG/Article6/CLPC_A6%20report_no%20crops.pdf.