Carbon Market

Carbon Market
Name	Carbon Market
Caption	Emissions trading visualization
Established	1990s
Related	Emissions trading, Carbon pricing, Kyoto Protocol, Paris Agreement

Carbon Market A Carbon Market is a market-based mechanism designed to reduce greenhouse gas emissions by assigning tradable value to emission reductions and removals, linking policy instruments, financial exchanges, and regulatory frameworks. It intersects landmark agreements and institutions such as the Kyoto Protocol, the Paris Agreement, the United Nations Framework Convention on Climate Change, and national schemes like the European Union Emissions Trading System and regional initiatives like the California Cap-and-Trade Program. Actors include multilateral development banks, private funds, and registries associated with projects under mechanisms like the Clean Development Mechanism and voluntary standards such as the Verified Carbon Standard.

Overview

Carbon markets emerged from treaty negotiations including the United Nations Framework Convention on Climate Change and the Kyoto Protocol, with pilot programs and national laws implemented in jurisdictions like the European Union and Japan. Market architecture brings together exchanges such as the Intercontinental Exchange, regulators such as the European Commission, and standard-setters such as the Green Climate Fund and the World Bank. Historical events like the COP21 summit and institutions such as the International Monetary Fund and Organisation for Economic Co-operation and Development have influenced design choices. Major companies engaged in markets include BP, Shell plc, ExxonMobil, Microsoft, and Tesla, Inc..

Types of Carbon Markets

Markets are categorized into compliance markets and voluntary markets. Compliance markets include systems established under the European Union Emissions Trading System, the California Cap-and-Trade Program, and national schemes in China and New Zealand. International mechanisms under the Kyoto Protocol included the Clean Development Mechanism and Joint Implementation, while Article 6 of the Paris Agreement frames cooperative approaches and international transfer of mitigation outcomes. Voluntary markets are supported by standards such as the Verified Carbon Standard, the Gold Standard, and registries run by organizations like the American Carbon Registry and Climate Action Reserve.

Mechanisms and Instruments

Instruments include tradable allowances, credits from offset projects, and carbon futures and options traded on exchanges like the Intercontinental Exchange and London Stock Exchange. Allowance systems use cap-and-trade models exemplified by the European Union Emissions Trading System and the Regional Greenhouse Gas Initiative. Offset instruments derive from project types validated by standards from bodies such as the Gold Standard (organization), Verified Carbon Standard, and methodologies approved by the Clean Development Mechanism board. Financing mechanisms involve multilateral entities like the World Bank, Asian Development Bank, and Inter-American Development Bank, as well as bilateral funds such as the Green Climate Fund and philanthropic initiatives like the Bill & Melinda Gates Foundation.

Participants and Governance

Participants include emitters regulated under schemes such as Shell plc and BP, financial intermediaries like Goldman Sachs, exchanges like the Chicago Mercantile Exchange, verification bodies such as Bureau Veritas, and registries administered by organizations like Markit. Governance involves national ministries (e.g., Ministry of the Environment (Japan)), supranational regulators like the European Commission, and international forums at Conference of the Parties meetings. Civil society actors include Greenpeace, World Wide Fund for Nature, and think tanks like the International Institute for Environment and Development and Resources for the Future.

Pricing, Trading and Market Dynamics

Pricing drivers include policy signals from the European Commission and national legislatures, demand from corporate buyers such as Microsoft and IKEA, and speculation by banks like JPMorgan Chase and Bank of America. Trading occurs on exchanges including the Intercontinental Exchange, Chicago Mercantile Exchange, and over-the-counter platforms facilitated by brokerage firms and clearinghouses such as LCH. Market dynamics are influenced by events like COP26, regulatory reforms in China and the European Union, and financial innovations from institutions like the International Finance Corporation.

Environmental Integrity and Criticism

Critiques come from scholars and NGOs including Carbon Market Watch, Friends of the Earth, and academics affiliated with London School of Economics and Massachusetts Institute of Technology. Concerns focus on additionality, permanence, leakage, and double counting in mechanisms such as the Clean Development Mechanism and voluntary offsets certified by standards like the Verified Carbon Standard. Policy reforms have been proposed by entities such as the High-Level Commission on Carbon Prices and regulatory bodies including the European Union and UNFCCC negotiators.

Regional and International Systems

Major regional systems include the European Union Emissions Trading System, the Regional Greenhouse Gas Initiative in the eastern United States, and the California Cap-and-Trade Program. China’s national emissions trading system was launched through pilots in provinces like Guangdong and cities like Shenzhen and scaled nationally with oversight from the Ministry of Ecology and Environment (China). International frameworks include cooperative mechanisms under the Paris Agreement Article 6, and initiatives coordinated by the World Bank and International Carbon Action Partnership.

Economic and Social Impacts

Economic effects are studied by institutions such as the International Monetary Fund and World Bank, with sectoral impacts on industries like aviation regulated by bodies such as the International Civil Aviation Organization and shipping discussed at the International Maritime Organization. Social considerations include distributional impacts assessed by agencies like the Organisation for Economic Co-operation and Development and labor implications for unions such as the International Trade Union Confederation. Co-benefits and trade-offs are monitored by research centers including Potsdam Institute for Climate Impact Research and Stockholm Environment Institute.

Category:Climate policy