Sustainability & CSR
The promise and potential of carbon trading
Carbon trading can play a crucial role in the path to net zero but only after errors, fraud and market abuses are addressed
By Paul Shelton
Taiwan opened a carbon trading exchange on Monday, 7 August in its first such move aimed at realizing carbon neutrality by 2050.
The Taiwan Carbon Solution Exchange (TCSE) is headquartered in Kaohsiung and is funded by the Taiwan Stock Exchange (TWSE) and the National Development Council (NDC).
The choice of Kaohsiung is interesting but mostly likely as it is Taiwan’s hub of steel and petrochemical industries, Kaohsiung makes sense with it playing an important role in driving the net-zero transformation of Taiwan.
The TCSE will provide services for carbon credit trading and other emission offset mechanisms for domestic businesses. According to the Presidential Office, the TCSE will also introduce cross-border carbon transaction services that enlist accredited international organisations.
The initiative is in line with the Tsai administration’s objective to reach carbon neutrality by 2050, a roadmap published last year and implemented in accordance with the Climate Change Response Act.
Taiwan’s aspirations are that the effort to push the net-zero transition will create economic output worth NT$5.9 trillion (US$186 billion) and 550,000 jobs. Taiwanese companies are being spurred to reduce their carbon footprints and invest in the development of low-carbon technology, and thereby boost the green economy.
Meanwhile global discussions on climate change continue to grow louder. As a result we’ve begun to hear buzzwords like net zero and carbon neutral, carbon offsets, and carbon credits (or carbon trading) making their way into our vocabulary. If we are to be better informed and therefore better equipped to understand the steps needed to protect the environment, we need to fully understand the buzzwords.
For example, do the two terms, carbon neutral and net zero, refer to the same thing? The two terms seem to be used interchangeably by the politicians, businesses, scientists, and experts driving the climate conversation, but caution is warranted with any buzzword. Whilst achieving net zero and carbon neutrality has the same end result, that is, removing harmful emissions from the earth’s atmosphere, the scale and kind of emissions removed are different.
What is the difference between net zero and carbon neutrality?
Net zero refers to the amount of greenhouse gases (GHGs), such as carbon dioxide (CO2), methane or sulphur dioxide, that are removed from the atmosphere being equal to those emitted by human activity. Emissions reductions would generally follow a certain trajectory, for example 1.5°C is often quoted as an important level of global temperature increase that should be avoided.
Many scientific studies since 2016 have suggested that limiting warming to 1.5°C can avoid the worst impacts of climate change. These scientific studies agree that climate change becomes larger in direct relation to more warming, and every fraction of a degree makes a difference.
Carbon neutrality is similar in that GHG emissions are offset, but carbon neutrality generally includes a wider definition of offsetting residual emissions, including emission avoidance activities, and carbon neutrality doesn’t typically prescribe a specific reduction target. Carbon neutrality is also less prescriptive regarding the reporting boundaries, with a wider definition of GHG emissions being encouraged but not mandatory.
Companies, both here in Taiwan and in many other countries, often speak about becoming carbon neutral. This means they’re taking steps to remove the equivalent amount of CO2 to what’s emitted through activities across their supply chains, by investing in ‘carbon sinks’ that absorb CO2. Carbon sinks, such as forests or oceans, absorb and store more carbon from the atmosphere than they emit so business see these carbon sinks as a way to offset their emissions.
Individuals are also striving for carbon neutrality. Sustainable lifestyle choices can help reduce each of our carbon footprints and limit our overall environmental impact. Using public transport over a personal vehicle, switching to a vegan diet, limiting food waste, recycling packaging and old clothes, and monitoring the carbon intensity of our homes’ power usage are said to be ways to pursue carbon neutrality.
Net zero is similar in principle to carbon neutrality, but is expanded in scale. To achieve net zero means to go beyond the removal of just carbon emissions. Net zero refers to all greenhouse gases being emitted into the atmosphere, such as methane (CH4), nitrous oxide (N2O) and other hydrofluorocarbons.
Action to reach net zero is happening on a global scale, but requires the collaboration of governments across the world, as well as private and other sectors. However, the world has a long way to go before it achieves either carbon neutrality or net zero.
It is in the efforts to achieve net zero or carbon neutrality that we begin to experience the terms carbon offsetting and carbon credits (often referred to as carbon trading). What do they mean and how do they work?
Carbon offsets and carbon credits defined
A carbon offset is a way to quantify an action that removes greenhouse gases from the atmosphere. Planting trees is a simple example of a carbon offset. Trees absorb carbon dioxide and ozone, so planting them is a way to remove these gases from the air.
When fossil fuels are burned, carbon dioxide is sent into the atmosphere. You can offset those GHG emissions by planting as many trees as it takes to absorb what emissions are produced but that simply isn’t always practical for a company involved in the production, refining and/or use of fossil fuels and that market remains huge. Hence a market has emerged whereby you can buy carbon offsets created by others.
A carbon credit is a tradable instrument that is either allocated directly to an emitting source or offered for sale at an auction (this may be via a voluntary market or now, as we have seen in Taiwan, via a regulated market, that is, the TCSE). Each credit represents the right to emit one ton of carbon dioxide.
Companies purchasing or receiving these credits can then resell them (thereby creating a secondary market) or submit them to some form of governing body or environmental regulator, in an amount equivalent to the quantity of their emissions over a given period.
In theory, working together by trading carbon credits, companies can reduce their carbon footprints.
While there is a difference between carbon credits and carbon offsetting, both have the same goal, which is to mitigate global warming by limiting the emission of greenhouse gases.
As noted above, carbon credits are a tradable instrument which may or not be part of a system created by government regulations. These instruments are designed to limit emissions from sources in one or more sectors of the economy and supported by institutions that track and verify compliance. The aim is to reduce GHG emissions by providing a financial incentive for companies to shrink their carbon footprint and typically, only companies and governments can participate in the trading of carbon credits.
All that sounds relatively neat and tidy, but it is there have been instances of voluntary markets being subject to abuse. Evidence has emerged that not all carbon offsets or carbon credits create actual reductions in GHG emissions, and some carbon credit speculators may have to write off billions of dollars against what have been proven as worthless carbon credits. But caution is merited against such headlines. The word “speculator” already suggests that some market players may have been trying to manipulate the market and their activities have come unstuck. Speculation issues beleaguer almost any global trading market, particularly those that are voluntary, regardless of product.
There is growing evidence that huge numbers of carbon credits do nothing to mitigate global heating and can even be linked to alleged human rights concerns, which certainly is not positive in what should be meaningful global efforts to achieve either carbon neutrality or net zero.
Globally famous companies such as Apple, Disney, Gucci, and Shell have been major users of unregulated carbon credit markets to support their sustainability efforts. The unregulated market is said to have grown to US$2 billion by 2021 and each carbon credit had a price of US$20 per offset. Such was the demand, even among these global players for carbon credits.
These carbon credits were said to be contributing to climate change reduction by stopping deforestation, tree planting and such “feel good” projects which were said to be creating renewable energy in developing countries.
However, global “audits” of these projects are proving them to be of little or no environmental worth, and at worst being nothing more than fraudulent schemes designed to profit from the unregulated trading of carbon credits. These audits have resulted in a slump in the demand for and prices of credit offsets and uncertainty has become inherent in the global market.
Recent global studies have also called into question claims by leading carbon emission certifiers, organisations that are meant to provide unbiased reports on projects that result in reduction in emission and therefore viable as carbon offsets. These studies have concluded that some certifiers have greatly inflated the alleged amounts of available carbon credits and there is in fact negligible conservation impact from projects involving these certifiers. To quote one audit, these certifier’s claims of carbon credits was nothing more than “hot air”, not what the market wants to hear when discussing GHG emissions.
In typical fashion with these “new” technologies, there was pushback from some of the certifiers who “welcomed input from the scientific community” but then immediately recognized areas for improvement in their current systems thereby perhaps hoping to avoid regulatory scrutiny and allegations of fraud or other related misconduct.
So, what is to be done. The real push for global climate change action started with what is known as the Paris Agreement, which is a legally binding international treaty on climate change. It was adopted by 196 Parties at the UN Climate Change Conference (COP21) back in 2016.
The Paris Agreement's central aim was to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius (as noted above).
Article 6 of the Paris Agreement is the main article for this purpose. Article 6 recognizes that some parties may choose to pursue voluntary cooperation in the implementation of their nationally determined contributions to allow for higher ambition in their mitigation and adaptation actions and to promote sustainable development and environmental integrity. By making it clear that countries can transfer carbon offsets internationally to deepen their emission reductions, Article 6 explicitly enables international carbon trading. Article 6 is crucial to the success of the Paris Agreement. It guides how countries should cooperate to generate deeper GHG reductions. But that was back at COP21 in 2016.
We are fast approaching COP28, where the UAE will host the 28th Conference of the Parties to the 2023 convention on climate change from 30 November until 12 December. The goal of COP28 is to unite the world towards agreement on bold, practical, and ambitious solutions to the most pressing global challenge of our time. COP 28 wants to fast-track a global transition to clean energy and decarbonise the energy industry as well as limit global warming to 1.5° C.
However, reports already exist of political infighting on the goals and agenda of COP28 even though the goals of previous COPs going back to COP21 have yet to be fully achieved. Results from COP28 will need careful review.
Climate change is proceeding and international pressure to reach net zero and carbon neutrality is increasing. Carbon offsetting and carbon trading will play a crucial role in transition but perhaps not in their current form. For it to be fully effective and make a real difference, it will be crucial to root out the fraud, manipulation and speculators from the market.
The world has little choice. Voluntary action was once lauded as the commonsense approach, but this has proven to be not up to the task. Global regulation with regulated trading platforms such as Taiwan’s TCSE may well be the only solution. Getting to net zero will take enormous global efforts by governments, regulators, companies and even individuals but it does appear to be the only sound way forward.
Paul Shelton is a consultant with 30 years of experience in the international financial services and related industries with skills in all aspects of legal and financial crime compliance and regulatory relationship advisory and management.