The carbon market is like most others: those who have surplus sell to those who need it, preferably at a price that satisfies both sides.
In the case of the carbon market, discussed at COP26, the United Nations Conference on Climate Change, what is bought and sold is not a physical product. Carbon is a simplified way of calling the emission of gases that cause global warming.
As the most common of them is the CO2 (carbon dioxide), the term carbon became a synonym for these gases in climate discussions.
Each ton of carbon dioxide corresponds to a carbon credit, which can be bought or sold. In a simplified example, if a country needed to reduce its emission by 1,000 tons of CO2, but he manages to cut 1,200 tons, he keeps 200 carbon credits, which he can sell to another nation that failed to meet its target.
The credits are valid not only for cut emissions, but also for carbon gas captured — for example, by newly planted trees, which absorb the substance from the atmosphere to grow. Every ton of CO2 The additional amount absorbed by a new forest entitles you to one credit.
There are pollutants that heat the atmosphere, such as methane or nitrous oxide (N2O). For activities that emit these substances, a calculation is made that compares their effect on the atmosphere with that caused by CO2.
This is why the expression “carbon equivalent” is used (in the acronym, CO2e): when a country cuts a ton of carbon equivalent, it means that it no longer emits gases whose effect of warming the atmosphere corresponds to a ton of CO2.
For example, the global warming potential of methane gas is 21 times greater than the potential of carbon dioxide. One ton of methane is then the same as 21 tons of carbon equivalent.
In addition to trading emissions between countries, other ways were created to encourage the reduction of gases, such as trading emissions between companies, local governments, communities or civil society entities.
The carbon market rules form article 6 of the Paris Agreement and have been negotiated at the COPs since the document was signed in 2015.
There are two items most discussed: 6.2, which provides the criteria to compare the emissions trading schemes of two or more countries and allows the bilateral transfer of carbon credits between them, and 6.4, which establishes a central UN mechanism for certify credits for specific projects.
In the case of countries, if country A pays for emissions to be cut in country B, by financing the installation of solar panels to reduce coal burning or reforesting a degraded area, for example, it can account for those reductions.
For each ton of CO2 emitted in one place, a ton must be captured or not emitted in another.
6.4 is the carbon market that the private sector can enter. For example, an investor in country A may finance a wind farm in country B to replace electricity generated by a coal-fired power plant. As a result, country B benefits from more clean energy and emissions are reduced.
If country B had a goal of cutting 100 tons and, with this project, it reaches 110 tons, the investor can sell 10 credits to a country that failed to meet its goal.
The rules need to be clear to everyone involved, so that this exchange mechanism between countries can start to work. The criteria are still being debated and the expectation is that a consensus would be reached in Glasgow.
If article 6 is regulated, governments will be able to impose national rules and establish targets for the reduction of greenhouse gases for different economic actors in society, which previously voluntarily committed to such reduction.
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