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The role of carbon trading in the Climate Change Challenge

By Dirk Forrester

In the six years that have elapsed since the Copenhagen climate talks ended in bitter acrimony, the tone of the debate has shifted significantly. No longer are we debating whether climate change is real or not; instead, the discussion has been more on what are we going to do about it. The process of each country preparing its Intended Nationally Determined Contribution (INDC) for the future agreement has helped focus minds on precisely this.

Of the 149 INDCs submitted to the UNFCCC secretariat as of the time of writing, about half are open to the use of international markets to fulfil their pledge (see map). Others, such as the EU, while having no intention to use international markets to meet their INDC, rely heavily on their existing domestic carbon markets– although excluding international markets risks closing the door to an important cost containment option.

This aside, what is missing – still, at this late juncture – is a clear role for markets in the Paris Agreement. And this is a cause for concern.

Several times, we have heard policy-makers state they want business involved in the new agreement, and that the IETA.ClimateSection..LayoutImageagreement’s success needs to see engagement from all actors, both state and non-state. We have seen more than 1000 business leaders, alongside 74 national governments and 23 sub-national authorities, call for carbon pricing to have a role in the Paris Agreement. We have seen exponential growth in emissions trading since 2009, with around 40% of global GDP covered by an emissions trading system (ETS) by the start of 2015  – a figure which is set to soar with new programmes coming online in China and Ontario in 2017, plus the prospects for a federal ETS in the US on the back of the Clean Power Plan regulation, to name a few.

Markets matter for the Paris Agreement for a few key reasons. Market mechanisms are the quickest, lowest cost way of achieving the environmental objective of reduced emissions. The price signal established by a carbon market acts as the economic incentive to make the reductions in the most cost-effective way for the individual emitter: be it investing in more efficient technology, switching from coal to gas, increasing the mix of renewables, carbon capture and storage, or offsets (if permitted).

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