The trading of credible carbon units will be a game changer

We don’t cut our own hair…

Our global economic model is built on comparative advantage, specialization and trade.

Whether it’s food that’s grown in certain parts of the world, commodities that are extracted, or people with particular skills that we pay for instead of doing it ourselves—we are willing to pay for things that can be produced at the lowest possible cost.

The trade of credible carbon units is based on the idea that in certain parts of the world emissions can be reduced at the lowest possible cost.

Put simply:

  • Entity A reduces emissions
  • The reduction is verified
  • Entity B buys that reduction as carbon units.

For emissions trading where greenhouse gases are regulated, one carbon unit is considered equivalent to one tonne of CO2 emissions, which is about the same as what’s emitted after driving a car for 3,000 miles.

Why would someone spend money to buy emission reductions?

There are two main groups that would be keen to purchase reductions—governments and businesses.

Governments—hitting that target

Every country has an emissions reduction target.

Countries that struggle to meet their target, or whose reductions are too expensive, can purchase reductions from elsewhere.

If the rules for emissions trading are structured properly, it can be a win-win for everyone involved.

Both countries involved in the trade meet their climate commitments and finance is provided to the country generating the emissions reductions.

Businesses—because they want to

Voluntary carbon markets allow companies and individuals to trade carbon units on a voluntary basis.

But why on Earth would they bother?

As previously mentioned, the business and finance worlds are starting to respond to climate change.

Many companies, including a fifth of the world’s 2000 largest, have committed to a net zero target.

Participating in a voluntary carbon market allows businesses to achieve these targets faster as they can dedicate carbon units towards their target.

Source: Click to enlarge.
Businesses—because they have to

With compliance carbon markets, companies are required to reduce emissions in line with a national emissions trading system.

But let’s take a step back.

A country has two choices if it wants companies to reduce their emissions:

Each of these options has its advantages and disadvantages; but often, incentivising companies through a market-based solution allows them to make rational, price-based decisions based on the information in front of them.

An emissions trading scheme is one of these options.

It is a type of flexible environmental regulation that allows organizations and markets to decide how best to meet overall policy targets.

Emission trading for greenhouse gases reduces emissions by creating a market with limited allowances for emissions.

If an entity goes under that limit, it generates credits.

If it goes over that limit, it has to purchase credits, either from another company or from elsewhere on the market.

This is where credible carbon units come into play.

Some emissions trading schemes allow these businesses to reconcile their excess emissions by purchasing carbon units from projects that reduce emissions and trade those verified reductions.

Everyday people like you and me

While governments and businesses are already players in emissions trading, what about us?

We all want to do something about climate change, but what?

An emerging concept is a retail market for credible carbon units.

so What makes it a game changer?

Without trading, a country’s options to reduce emissions are limited to within its borders.

Countries like Canada and Australia, which have abundant land and diverse resources, are better placed to reduce their emissions than say, Singapore, which is constrained by a dense, urban population.

Its options to transition to zero emissions may be limited and pursuing emissions reduction opportunities beyond its borders in neighbouring South-East Asian countries could help Singapore achieve more, faster.

This is the same for every country, which has different emissions reduction opportunities at different costs.

Until recently, the options available to purchase emissions reductions were limited, and international emissions trading schemes were set up with varying impact.

Under the Kyoto Protocol’s Clean Development Mechanism, wealthy countries provide finance to emerging economies who agree to run emissions reduction projects in their countries and hand over the credits from that project back to the wealthy countries.

With the move from Kyoto to Paris, a new system had to be established.

In 2021 at COP26, the rules for Article 6 of the Paris Agreement were finalised, setting the groundwork that will allow countries to trade emission reductions with one another.

With a new international framework, more mature domestic emissions trading systems, more consumer awareness and greater transparency, emissions trading could be about to take off in a big way.


Purchasing a piece of paper that claims emissions have been reduced in a developing country. What could go wrong?

Of course, a lot.

Firstly, governments and businesses could simply use carbon units to buy their way out of having to change their business model or reduce their emissions at home.

Aside from that, there are ways the market can be subject to fraud.

Meet Johnny Un-credible.

Johnny’s building a wind farm in an emerging economy.

He’s also doing everything in his power to commit fraud in the carbon offset market.

Click to enlarge

Johnny is not alone, and these fraudulent actions continue. But as the market matures, consumers are more aware of which carbon units are credible, leading the Johnny Un-credibles to the sidelines.

With carbon units that are real, quantifiable, permanent, additional, verified and avoid leakage, a credible system can be put in place that sees real emission reductions achieved—fast.

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