The Speaker
Thursday, 13 June 2024 – 06:13

What are Carbon Credits?

In between the constant reports of strike action there has been a lot of talk in the news about the approval of a new coal mine in Cumbria. Its approval has been met with controversy with some arguing that its approval is at odds with the UKs Net Zero climate commitments. Micheal Gove argued in the Commons that the mines operations will be Net Zero even though it will produce 400,000 tonnes of carbon a year before the coal that is mined is actually burnt. Gove has been accused of Greenwashing the project by suggesting that the project will purchase something called Carbon Credits, which will make the project Net Zero. There were two terms in the previous sentence which might be alien to you and definitely were to me; Greenwashing and Carbon Credits. For now however I want to focus on Carbon Credits, what these things actually are and how purchasing these things can suddenly make a project that produces 400,000 tonnes of CO₂ a year carbon neutral.

But before we get into what Carbon Credits are, let’s take a step back. To properly understand Carbon Credits and the system they work in, we need to take a look back at the evolution of the laws and agreements that led to their creation.

In the late 1980s, the US had a problem with Acid Rain. Acid Rain is produced when large amounts of SO₂ is emitted into the air, this collects in the clouds and falls back down in rain. The pH of the rain is lowered by the SO₂, the rain then starts to damage infrastructure, and kill plants and animals in water ways. So in 1990 the US passed the Clean Air Act, this created a new market to solve this problem, to encourage polluters; mainly large factories, and corporations to reduce the amount SO₂ they produce. The market was based on something called the cap-and-trade principle. The solution worked and the acid rain was reduced.

Then, in 1997, at a UN Climate Change Conference, an agreement called the Kyoto protocol was agreed upon in a bid for all representatives at the conference to reduce emissions. The method used was based on the USs’ cap-and-trade solution to acid rain. Then in 2012, at the Paris conference, an amendment called the Doha amendment was introduced; this was signed by 190 countries and continued using the cap-and-trade model to regulate greenhouse gas emissions.

So how do cap and trade markets work? A government sets a cap on the amount of CO₂ that can be emitted by a given industry and also works out penalties for violations which are usually fines. These caps on how much carbon an industry can produce are reduced over time. Each company is then given an allowance for how much carbon they can produce based on historical records of how much carbon each company produces. These allowances are split up into credits. These Carbon Credits are equal to 1 ton of carbon and have a set value assigned to them. These Carbon Credits can then be traded on a secondary market between companies.

So, for example, if a company innovates by managing to produce less emissions and has Carbon Credits left over they can then sell these to other companies and make money. The incentive being that the less carbon they produce, the more credits they have spare and can sell, and the more money they can make. Vija Viatheewaran, the Global Energy and Climate Innovation editor at the Economist, describes it as the “Stick and Carrot” approach. The carrot being the encouragement of selling more and more credits the more they innovate and the stick being the cap on the amount of carbon they can produce, which is reduced over time. In theory, he suggests that this model could be perfect in reducing carbon emissions. However, emissions are not reducing; they are still increasing. So why is this?

There are a number of problems with cap and trade; firstly, the cost of a Carbon Credit is simply too low to provide any real incentive. To reach the goals put in place by the Paris Climate Agreement it would need to be about $50-$100 a ton, according to Stern and Stiglitz (2021) this is far above the current price of most markets, excluding the EU, which are hovering around $4. If a company produces more carbon then they are permitted or try to cheat the system; the fines are often ineffectively low.

Furthermore, the world is a wash with different carbon markets, which have a wide variety of different rules and enforcement practices. So companies can move to countries with less strict rules in what is known as carbon leakage. These high emitting companies can move production to a country with lax legislation and produce masses of carbon, meaning more ends up in the atmosphere.

Solutions to carbon leakage have been suggested. One known as Carbon Border Adjustment Mechanisms (CBAMs). This means certain imports such as steel, aluminium or chemicals are subject to taxes creating a level playing field between places that have different carbon regulations. The EU has taken steps recently to introduce CBAMs in a bid to reduce carbon emissions.

Many suggest this is not enough; that the only way to make any real progress towards a sustainable future is a global carbon market rather than a patchwork of different markets. Having a global market would remove the problem of carbon leakage. But according to Vija Viatheewaran, the main problem is China; as of yet it has made little effort to work with other countries in creating a global carbon trading system.

But even if a global carbon trading system is established which could take years, the fight would not be over. The world economy is reliant on carbon-intensive processes; processes other than the production of goods. Personal transport for one would be difficult at best to bring under the fold of a carbon trading market. Governments face not only the problem of getting industries to move to a more renewable way of working but also the individual to live in a more sustainable way. From personal forms of transport such as cars to public transport like trains or planes. Efforts have been made to make these more renewable, but like reducing global carbon emissions, we won’t know for certain if what we are doing is going to work or whether what we are doing is enough. We have to pressure our governments, push for them to work towards a sustainable carbon zero future and then wait and see; the passage of time is the only thing that can reveal whether what governments are doing will work or whether what they are doing is enough to reach a carbon zero future.

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