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Macroscope
CommentWorld
Chris Iggo
Chris Iggo

Macroscope | To get to net zero, we need an effective global carbon credit market

  • The carbon trading system agreed in Glasgow will help with the visibility of carbon pricing but more needs to be done
  • As carbon pricing becomes more widespread, global collaboration is needed to avoid carbon dumping and tackle broader economic implications such as inflation

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A person wearing a mask depicting Britain’s Prime Minister Boris Johnson protests during COP26 in Glasgow, Scotland, on November 12. An effective carbon trading system is a necessary tool in the transition to a net-zero economy. Photo: Reuters
Chris Iggo
One of the more important agreements made in Glasgow at the COP26 summit on climate change was on a global system for trading carbon. Under the auspices of the United Nations, the system will provide for the allocation of carbon credits linked to projects and activities that reduce greenhouse gases – for example, renewable energy plants or the cultivation of forestry land.
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These credits will be set against a country’s emission-reduction targets and/or sold to raise finance, providing an offset to carbon emissions in another country. Essentially the agreement provides a framework for a global carbon market, which will facilitate cross-border green financial flows and provide more visibility on the price of carbon.

To illustrate simply how the system would work, we can imagine a new wind-turbine power plant being built in country A to replace an old coal-fired power station. The switch might reduce carbon dioxide emissions by 100 tonnes.

Once verified, country A would be granted 100 carbon credits which could directly be set against its nationally determined contributions (NDCs) – the system developed by the UN to track global emission plans on a country-by-country basis to determine whether, collectively, we are on track to stop global temperatures from rising by more than 1.5 degrees Celsius by 2050.

Country A could thus count its carbon emissions as having been reduced by 100 tonnes, or it could sell some of the credits, say 20, to country B. The rules of the system mean that country A would be able to claim it had reduced emissions by 80 tonnes and country B would be able to offset 20 tonnes of its emissions through buying the carbon credits.

03:07

Climate deal to ‘phase down’ coal reached at COP26 as nations seek to avert climate disaster

Climate deal to ‘phase down’ coal reached at COP26 as nations seek to avert climate disaster

It is feasible that some countries might be able to generate more carbon credits than needed to meet their NDCs. For example, Chile could exploit solar energy more efficiently than many countries because much of the country is at altitude, and the sun’s rays are stronger there.

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