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Carbon Markets

Carbon markets enable the trading of emission units. The aim is to reduce greenhouse gas emissions by setting limits on emissions. Entities that can reduce their emissions at a low cost can be paid by high-emitters to do so, meaning they are buying certificates from low-emitters. This should keep the economic cost of reducing emissions lower. Gradually, however, allowances must be bought back from the issuer in order to reduce the overall cap.

The EU Emissions Trading Scheme (ETS) is considered the largest trading place and the first multinational system of a carbon market. The principle of this is the “Cap & Trade System”. Other markets also exist, such as an additional protocol to the Kyoto Protocol, which provides an instrument for trading emission rights between countries, the Wester Climate Initiative (WCI), several voluntary trading systems on a company or asset basis in the USA and Canada, and the Chicago Climate Exchange (CCX), which is also a voluntary trading system.

In the context of the ETS, there is a recurring debate about the upper limit, which is considered to be too high to meet the climate targets. In addition, for many, the price seems too low to give companies a real incentive to actively reduce emissions rather than just buying carbon credits and, if necessary, buy additional certificates from low emitters. To encourage active reduction, the price per certificate must be higher than the cost of adapting processes to save one tonne of GHG emissions.

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