The Carbon Market: Incentivizing CO2 Reduction

As global temperatures have continued to rise in modern times, there has been an increasingly vocal push for a reduction in CO2 emissions. From a business standpoint, however, green initiatives are often equated with added expenses, scaling back of productions, excessive red tape, and ultimately, a decrease in profits.  

That’s why many are hoping that the promotion of carbon markets can help change how industries see COreduction. 

Carbon markets have existed for some timewith modern roots tracing back to the UN’s 1997 Kyoto Protocol The specifics can vary between industries and regions, but the concept remains roughly the same. An industry or sector is given a limit on the amount of CO2 they can produce. If they emit less than this amount, their remaining allotment can be sold as a “carbon credit”. Another business/region/sector can then purchase this carbon credit, counting the emission reduction towards their own target. 

The idea is that it incentivizes businesses to be more aggressive in reducing their carbon emissionsWith a properly regulated carbon market, not only is CO2 reduction environmentally responsible, but it can prove fiscally beneficial. It could also create greater collaboration across industries, regions, and countries, furthering benefiting our planet’s environment. 

The Environmental Defense Fund (EDF) say that a global carbon market system could increase emission reduction by 91% over the next 15 years. This translates to 70 billion tons of additional CO2 reductionTo put that in perspective, all of the transportation in the US emits roughly billon tons of CO2 each year. Needless to say, this would be a massive shift. 

The Concerns Over Carbon Markets 

Despite its potential, certain groups have expressed reservations about the implementation of carbon markets. Some believe it’s too easy to manipulate. For example, a business may try to count their reduction towards its own target while also selling it to another party where it is counted a second time. Others say it enables inaction among those purchasing credits. Rather than actively reducing their emissions or making long-term changes, they can simply purchase credits. 

This ultimately works against the concept of achieving net zero, where the amount of carbon being produced is equal to the amount of carbon that is being actively reduced or stored.  

From a political standpoint, there is division over carbon pricing on both sides of the aisle. More progressive Democrats see it as counterintuitive, while strongly conservative Republicans believe it’s unnecessary. However, there is rising support from members of both parties who see it as a way to help businesses thrive while encouraging them to be more environmentally ambitious.   

A Growing Demand for a Stronger Carbon Market

From a business standpoint, demand for market-based carbon pricing is rising. Earlier in September, the Business Roundtable, a major trade association that includes representation from some of the largest US companies, endorsed market-based systems to help combat climate change. They believe that placing a clear price on carbon will encourage innovation, drive efficiency, and ensure sustainable efforts. 

Power companies share this view as well. They recently told the Federal Energy Regulatory Commission (FERC) that they were behind carbon pricing. Though existing laws could provide a framework for regulated carbon pricing, the specifics of how this will be implemented and overseen have not yet been decided. Current disagreements include whether prices should be applied on a national or regional level, as well as how transparent pricing needs to be for bids.  

Still, there is a strong general consensus between businesses and organizations that carbon pricing is a step in the right directionFERC is confident that we are on the verge of a major breakthrough. 

“We’re at a pivotal point when it comes to these discussions,” said FERC Chair Neil Chatterjee. “A point that I think will ultimately lead to action in some shape or form.” 

Creating a Well-Regulated, Inclusive Carbon Market 

Clear rules and standards will be critical in tracking guaranteeing the environmental benefits of carbon pricing while guarding against manipulations such as double-counting reductions. Inclusivity is also important for establishing a true carbon market. Even as demand for carbon offsets has grown, current restrictions have made it difficult for groups like farmers and landowners to actively participate 

This summer, the Growing Climate Solutions Act was proposed. This bipartisan bill would establish a USDA certification program would allow farmers to participate in the carbon market more easily. Currently, agriculture contributes roughly 10% of the world’s greenhouse gas emissions. With the advantages of herbaceous sequestration, farmers and landowners could play a significant role in reducing CO2 levels through actions such as establishing pollinator habitat and native grasslands.  

We’ll discuss the state of agricultural carbon markets in greater detail in our next post.