Photographer: F. Carter Smith/Bloomberg

Paying-to-Pollute Flourishing With China Planning Carbon Market

  • Cap and trade finds favor with businesses and governments
  • Global carbon deal expected to be signed in Paris in December

The world is coming to terms with the idea that putting a price on carbon emissions is necessary to fight global warming. Now there’s a growing consensus on how to make it happen.

Cap and trade.

After years of political defeats and operational snafus, systems that let companies buy and sell the right to pollute are gaining traction as a way to reduce emissions without dragging down the economy. With less than two months before nations are expected to finish a binding global deal to rein in greenhouse gases, Japan, South Korea, dozens of U.S. states and the Canadian provinces of Ontario and Quebec are among governments coming out in favor of these carbon markets.

“While emissions trading was for some time only a European thing, times have changed,  and we have an increasing number of national and regional schemes,” said Ingo Ramming, the London-based co-head of commodity solutions at Commerzbank AG. “We believe that this trend will continue, carbon pricing and emissions trading will play an increasingly important role.”

Along with the growing number of state and and national governments backing carbon markets, China, the world’s biggest polluter, last month reiterated its plans to introduce a nationwide emissions-trading system as early as 2017. That’s raised hopes the world will end up with at least a patchwork of pollution markets, though not the global system that proponents once hoped for.

The announcements come before a United Nations meeting in Paris in December, where almost 200 countries are expected to sign a pact to cut carbon dioxide and other pollutants blamed for global warming. The deal isn’t expected to include specific policies to achieve this, and many governments have been considering two main options: carbon markets or taxing emissions.

Businesses have touted trading as a cost-effective way to shift the world away from fossil fuels, one that encourages companies to find the cheapest way to cut emissions. That’s emerging as a key selling point over taxes, which can be simpler to impose but don’t offer the same incentive to innovate, according to proponents. Worldwide, carbon markets reached $34 billion in volume last year, up $2 billion from the year before, according to the World Bank.

“We see a carbon price as a mechanism for driving innovation," Glen Murray, Ontario’s environment minister, told a conference on emissions trading in New York in September. “We now have a critical mass of governments. We’ve passed the tipping point."

Pollution markets, often referred to as cap-and-trade systems, typically put a total limit on emissions and then let companies buy and sell permits for each ton of greenhouse-gas they release.

European Market

The idea has been around for a while, and trading was a key part of the global warming treaty approved in Kyoto, Japan, in 1997. Implementation hasn’t gone as smoothly; after Europe introduced the world’s biggest carbon market a decade ago, prices plunged to less than 3 euros in 2013, from about 30 euros in 2008, as the financial crisis cut demand for emissions permits.

Similar programs in the U.S. also faced price slumps due to an oversupply of permits. In the U.S., President Barack Obama’s proposal for a national cap-and-trade market died in Congress in 2009, with Republicans ridiculing it as “cap-and-tax."

Obama’s power plant pollution rules, unveiled in August, opened the door for some trading, and a national emissions market would be the “the preferred approach,” U.S. Energy Secretary Ernest Moniz said in an interview Oct. 1 in Istanbul. However, he said it’s “a pretty safe bet” that Congress wouldn’t approve such a system, and the U.S. instead is relying on policies that can be implemented by state and federal agencies without legislation.

Including taxes as well as trading, 39 nations and 23 sub-national governments now impose a price on carbon, the World Bank said in a report last month. They cover about 12 percent of global emissions, up from 4 percent a decade ago. The bank is helping 17 countries explore their options, including potential markets in Morocco and Thailand, according to Vice-President Rachel Kyte.

‘How and When’

“We’ve gone from whether or not to put a price on carbon to how and when," she said in an interview.

The jumble of local programs is a far cry from what was envisioned under the Kyoto Protocol. Back then, proponents discussed a future in which robust trade between rich and poor nations helped finance environmental projects, while regulators and trading houses worked in tandem to ratchet down emissions.

Instead, climate advocates may have to settle for stitching together national and local markets, each with its own rules on tracking emissions and trading across borders.

“The real question is how is it going to be possible for such different markets to link," said Nick Campbell, who heads the climate-change working group at BusinessEurope, the continent’s largest association of employers. The answer still isn’t clear, he said.

After Kyoto, the UN introduced its own carbon market, the Clean Development Mechanism, that could have provided a common currency to disparate national systems. But prices there have slumped just as in Europe.

The next test comes in Paris, where proponents hope the international agreement includes at least a reference to markets that collaborate across borders.

“It’s a lost opportunity if they don’t send a signal about the importance of carbon pricing," said Dirk Forrister, president of the Geneva-based International Emissions Trading Association. “The real power of the Paris agreement is going to be in how much cooperation it unleashes."

For more, read this QuickTake: The Cost of Carbon

Before it's here, it's on the Bloomberg Terminal. LEARN MORE