The future of global carbon markets
Existing and planned carbon markets
There is no global carbon market yet, but rather a dispersed set of regional markets at varying jurisdictional levels.
The current carbon markets are comprised of four main systems:
- Emissions trading or cap-and-trade systems for energy-intensive business sectors and governments
- Kyoto flexible mechanisms, both on a public and private level
- Domestic offset schemes
- The voluntary carbon market
Emissions trading system
Companies are increasingly affected by both voluntary and mandatory emissions trading systems (ETSs) around the world.
At present, the European Emissions Trading System takes up between 84% and 98% of the value of all carbon markets. In the US, the Regional Greenhouse Gas Initiative, a regional cap-and-trade system involving the power sector in nine states and provinces in the US, has been active since 2009.
New Zealand has an active national ETS and Australia has recently passed laws to follow suit from 2015. The next few years will see a number of countries and states introduce cap-and-trade systems to join the more established EU ETS.
The world’s two biggest emitters, the US and China, are contemplating national ETSs.
A number of other developing countries are assessing domestic trading schemes using grants from the World Bank’s PMR fund, including Brazil, Chile, Mexico, Colombia, Thailand, Vietnam, South Africa, Turkey and Ukraine. The Mexican Government has already passed a climate bill that includes a domestic ETS.
Kyoto flexible mechanisms
Flexible mechanisms were established under the Kyoto Protocol to provide the industrialized country signatories with alternatives to reducing greenhouse gas emissions domestically.
There are three mechanisms:
- International Emissions Trading
- Joint Implementation
- The Clean Development Mechanism
A second commitment period to the Protocol was negotiated at the 17th Conference of the Parties (COP 17) in Durban. This implies that the flexible mechanisms will continue until 2020 at least.
Domestic offset schemes
Domestic offset schemes are seen as a mechanism to stimulate further emission reductions and abatement investments in the non-traded sector. Project activity is carried out in the investor country and no other country is involved.
The voluntary carbon market
Compared with the mandatory and voluntary cap-and-trade systems, the unregulated voluntary carbon market is very distinct.
Although the volume of this market represents less than 0.3% of the global carbon market, it is interesting from a corporate strategy point of view and because of the rapid growth of the market. It provides carbon offsets to compensate for greenhouse gas emissions that are not covered by the compliance schemes.