Analysis: Will Carbon Markets Keep the Planet from Heating Up?

Growing interest among national and regional governments in curbing carbon emissions has led to rapid expansion of the global carbon market.

Policymakers worldwide are recognizing the true costs of carbon emissions for our economy and our environment. These markets could not have taken off without strong policy leadership. But while many U.S. states are taking action, the national government is falling notably behind by not setting a national cap on carbon emissions.

Worldwide, carbon trading reached a value of $59.2 billion in 2007, up 80 percent over 2006, according to estimates from the market research group Point Carbon. The European Union’s Emissions Trading Scheme (EU-ETS) is the largest carbon market to date, with a trading volume of more than 1 billion tons of carbon dioxide (CO₂) per year. The EU-ETS is helping the EU meet its targets under the Kyoto Protocol at an annual cost of $4.3–$5.4 billion, or less than 0.1 percent of the region’s gross domestic product. In 2006, the EU-ETS more than tripled the volume traded during the previous year.

Voluntary markets are also showing strong growth, as businesses, organizations, and individuals purchase carbon credits to offset their greenhouse gas emissions. Ecosystem Marketplace estimates that at least 23.7 million tons of CO₂ equivalent were exchanged over-the-counter or through formal market mechanisms in 2006. The Chicago Climate Exchange, a voluntary market based in the United States, reports that its trading volume doubled in 2007, to 22.9 million tons.

The effectiveness of these markets in addressing climate change is uncertain, however. Government inaction in the United States—the world’s largest CO₂ emitter and the only industrial nation that has not ratified the Kyoto Protocol—threatens to mute the concerted efforts of the 176 other countries (plus the EU) that have ratified the Kyoto Protocol. And stricter international targets and national carbon caps are needed for significant reductions to occur.

In the meantime, several state and regional initiatives in the United States and Canada are gaining momentum. Under the Regional Greenhouse Gas Initiative, set to begin in 2009, at least 10 northeastern U.S. states have committed to cap regional CO₂ emissions at 1990 levels by 2014, and to reduce them by 10 percent below that level by 2018. Similarly, the Western Climate Initiative, involving several Western U.S. states and two Canadian provinces, has set a goal of bringing regional emissions to 15 percent below 2005 levels by 2020 by establishing a market mechanism.

While carbon credits are a potentially powerful means of combating climate change, it is imperative that they be marketed and purchased with a clear understanding of what they do—and do not—represent. Carbon credits vary greatly in origin, quality, and price—especially on the relatively unregulated voluntary market. Reputable certification systems exist to help buyers differentiate between comparable carbon credit and offset products. But the first step toward ‘greening’ any business or personal practice should always be outright emissions reductions.

This story was produced by Eye on Earth, a joint project of the Worldwatch Institute and the blue moon fund.