If you don’t work in sustainability or finance, chances are that all the recent talk about carbon credits and carbon markets go over your head.
Is it a newfangled financial instrument meant to alleviate an emitter’s guilt? Is it a form of carbon tax? What makes it worse is that all the recent developments on this front are clad in jargon – implementation agreements, Article 6, corresponding adjustments.
Despite the technicalities involved, these developments are not something that only sustainability or finance people should care about.
Politically and economically, the carbon market is also interesting, especially given the recent inward turn that many countries are taking, forgoing multilateralism in the name of national interests. Because at the heart of every carbon trading agreement is the willingness of two countries to cooperate to achieve climate goals.
Last week, I attended the North America Climate Summit, organised by the International Emissions Trading Association, on the sidelines of New York Climate Week. Singapore’s director-general of climate change Benedict Chia, speaking during a panel discussion there, explained the significance of carbon markets well.
“The carbon market employs a cooperative approach, whereby different companies, different countries, come together, work together, to unlock a payment that would not have occurred otherwise,” he said. “And this cooperation unlocks payment, crowds in financing, and this is absolutely critical in the year in which countries around the world are supposed to submit their (2035 climate targets).”
“(Cooperation in the carbon markets) is becoming increasingly more important because of the various headwinds that we have been facing in terms of economics, in terms of geopolitical, global environment itself,” he added.
Let’s break down his comments.
Under the Paris Agreement, countries can buy carbon credits from one another in order to achieve their own climate goals. This is significant, as it means that each does not need to just rely on what it can do within its own borders to cut emissions.
A country like Singapore, for example, cannot be expected to make a dent in its emissions even if it blankets the entire country with solar panels. Being able to cooperate with another country to reduce its emissions can be a significant enabler for it to contribute more to safeguarding the global commons.
Because it now has the avenue to cooperate with other countries to reduce its emissions, it can set more ambitious climate targets. Carbon markets can also offer a polluting country more cost-effective solutions to reducing its emissions.
But what does the host country stand to gain? As Mr Chia said, it “unlocks a payment that would not have otherwise occurred”. Private sector participation is also encouraged.
There are many types of projects that can generate carbon credits.
By restoring a degraded forest for example, carbon credits can be generated, since the restored habitat draws down carbon dioxide from the atmosphere. This revenue from carbon credits gives a project developer the financial incentive to kickstart this carbon project. Without this revenue stream, the forest restoration project would not have otherwise been undertaken.
Carbon trading agreements signed between countries take into consideration the priorities that a host country has, and provide a signal for where they want carbon revenue to flow to.
Singapore has so far signed nine carbon trading agreements with countries around the world – Vietnam, Thailand, Bhutan, Chile, Ghana, Papua New Guinea, Peru, Paraguay and Rwanda.
The agreements are uploaded on the Singapore carbon markets cooperation website, and provide insight into what the different host countries consider priority areas for receiving carbon revenue. In Rwanda, many approved methodologies for generating carbon credits relate to things such as energy efficiency and renewable energy generation. In other countries, more types of carbon projects are accepted.
The carbon markets are not always perfect, and can be susceptible to manipulation. But we should not throw the baby out with the bathwater, especially given the political and economic lessons we can glean from these developments.
For more on the carbon market front, here are some of the latest developments from my colleagues
Shabana Begum D/O Nazeer
and
Qing Ang
.
Recommendations
