By: Chenming Song
In recent years, carbon/ emission trading systems (ETS) have emerged as a key policy to address climate change, encouraging companies to limit their carbon emissions by imposing economic incentives and constraints. This is achieved through carbon markets, which enable entities to buy and sell carbon credits or allowances, allowing individuals and businesses to emit carbon dioxide or equivalent greenhouse gases. By assigning a market price to carbon emissions, these systems aim to impose costs on environmentally impactful practices and encourage companies to shift away from carbon-intensive energy sources and invest in greener technologies. To clarify, there are two main types of carbon markets: compliance carbon markets (CCMs) and voluntary carbon markets (VCMs). CCMs are set by governments, mandating companies/industries to emit less than their carbon credit allowance. VCMs are set by companies/NGOs, allowing people or other organisations to voluntarily offset their carbon emissions through initiatives like carbon recapturing or afforestation programs. This market-based method also motivates companies to come up with innovative solutions and invest in cleaner technologies, as they can get gains from the process of reducing emissions below their maximum limits (since companies can sell unused carbon credits). Besides, when the government organises auctions for emission permits, they generate money which can be used to fund renewable energy projects (revenue from the credit itself and the transaction fees). So, do ETS systems work? Well, they have demonstrated tangible impacts in reducing greenhouse gas emissions. For example, the EU ETS system has helped cut emissions from power plants and heavy industries by ~25% since 2005. Similarly, the implementation of South Korea's ETS led to a 9% emissions reduction within five years. These cases highlight how well-designed ETS can encourage industries/companies to adopt cleaner technologies and reduce their carbon footprint.
