do carbon markets work?

How do we convince corporations to emit less carbon?

Governments can apply emission restrictions, companies can voluntarily pledge to adopt greener practices, but financial incentive is often the most powerful tool.

That’s where carbon markets come in. Carbon markets are trading systems where carbon credits are bought and sold by corporations, countries, or individuals.

One carbon credit is equivalent to one metric ton of carbon dioxide (CO₂) that is reduced or otherwise not emitted into the atmosphere.

The idea is that as companies emit less, they are awarded carbon credits which they can then sell or trade. This provides financial motivation to curb emissions and adopt greener practices.

If another entity is over-emitting or not meeting their goals, they can purchase extra carbon credits from their greener counterparts, incurring a cost for their lack of eco-friendly practices.

In most cases, the participants in the carbon market have a limit, or “cap,” on the amount of CO₂ they’re allowed to emit. That’s why many carbon markets are referred to as “cap-and-trade” systems.

In a compliance market this limit is dictated by a government or by international policy and is mandatory for all participants.

In a voluntary market, participants can decide to join the carbon market to improve the appearance of their company or adhere to self-imposed standards. Voluntary markets consist mostly of private entities.

Since the 1997 Kyoto Protocol, carbon markets have become increasingly popular as a way to curb carbon emissions and incentivize green economic practices. One notable is example is the European Union ETS (emissions trading system), which is a compliance market for the EU. This carbon market is particularly significant as the world’s first major carbon market and one of the few to apply to nations as opposed to corporations.

California and Washington state also have compliance carbon markets. The cap-and-trade program in California gradually decreases the amount of available carbon credits, aiming to lower total emissions over time.

In theory, carbon markets create a ceiling for industry emissions, lowering the amount of atmospheric CO₂ and incorporating climate action into the economy. But are they actually effective?

Critics of carbon markets argue that emissions baselines are set too high, rendering the cap-and-trade system effectively worthless.

Even though some corporations reach their emissions goals, over-emitters still produce CO₂ at the same rate by buying excess carbon credits. Ultimately, the worst offenders can continue with business as usual as long as they pay a small price.

In fact, the Clean Development Mechanism, a carbon market established by the Kyoto Protocol that allowed wealthier countries to buy carbon credits from poorer states, may have actually increased global greenhouse gas emissions.

And research has shown that up to 90% of voluntary carbon offset projects do not have any real impact on emissions reduction.

One such controversial project is REDD+ (“reducing emissions from deforestation and forest degradation in developing countries”), a unique carbon market that aims to curb emissions by preserving critical forest ecosystems.

Although often touted as one of the most successful and equitable carbon markets, a study by UC Berkeley suggests that REDD+ climate claims are wildly exaggerated.

And even if a project successfully reduces net emissions, that doesn’t mean it’s universally beneficial.

For example, hydroelectric dams are much more carbon-efficient than fossil fuel-based energy sources, but can wreak havoc on rivers and wetlands and the people that inhabit those ecosystems.

As always, one-size-fits-all solutions to climate issues are imperfect and often result in further injustice.

Carbon markets are no exception. It’s difficult to quantify exactly how much carbon will be kept out of the atmosphere, and it benefits corporations to oversell their emissions reduction strategies.

Without greater transparency, firmer limits on carbon emissions, and commitment to equitable and just emissions reduction strategies, carbon markets cannot and will not be the answer to the global climate crisis.

Yet at the same time, carbon markets do put a price on emissions, something that is crucial to integrating climate policy into the economic sphere. And compliance markets can be an effective way to ease corporations or states into more eco-friendly frameworks.

Carbon markets aren’t going anywhere, and perhaps they shouldn’t, but I’m always wary of systems that prioritize economic growth over the health and safety of our planet and people.

As society starts to put a greater emphasis on climate action, I think carbon markets will become more and more prevalent, and I think it’s imperative that we understand how (and if) they work.