Global warming isn’t just affecting the natural environment, it is also spurring the emergence of new pollution regulations and emissions trading markets, creating a new business paradigm in which less is clearly more.
LESS IS CLEARLY MORE
Navigating the patchwork of carbon trading markets sprouting up around the globe may be complex, but experts say the evolution of such market-based systems and accompanying regulations represent positive steps in the battle against climate change.
Emissions trading offers a market-based approach to control greenhouse gas emissions by providing regulations and economic incentives for achieving reductions.
Andrei Marcu, executive director of the International Emissions Trading Association, says, “Emissions trading allows countries or organizations inside countries the most economic
and affordable potential system of reducing greenhouse gas emissions to sell credits to others that need to make this reduction, but which have higher marginal abatement costs. This is the cheapest overall solution for society.”
Carbon trading, a shorthand for trading of carbon dioxide and other greenhouse gases, currently makes up the bulk of all emissions trading.
Carbon-emissions trading has been steadily increasing in recent years. According to the World Bank’s “State and Trends of the Carbon Market 2007,” 1,639 million metric tonnes of carbon dioxide equivalent were exchanged globally in 2006, a 131 per cent increase relative to 2005.
In a cap and trade system, a regulatory body sets the total number of tonnes that can be emitted each year by individual companies. At the end of the year, each company reports its GHG emissions.
Companies that reduce their emissions to a level below their limit will earn credits, with each credit giving the holder the right to emit one tonne of greenhouse gas. Companies facing fewer options to mitigate their emissions will buy credits, so that their actual emissions will be covered by their allocated limit plus the credits they hold.
Where emissions trading gets complex, says Mr. Marcu, is in deciding how much everybody can emit. “How do you divide the pie globally? Then,
how do you divide the pie within each country’s own economy?” he says.
“Everyone thinks their case is special, and big producers feel that limiting their emissions limits their potential economic success.”
Mr. Marcu says many companies participating in carbon trading do so as a shortterm solution, while they work on the longer-term issue of emissions reduction. “Business and government are preoccupied by the necessity to work in a carbon-constrained world, and are working to prepare themselves,” he says.
Richard Evans, president and CEO of Rio Tinto Alcan, spoke at the October 2007 Climate 2050 conference in Montreal, remarking, “If our ambition is to reduce the carbon burden on the atmosphere, we should use proven market mechanisms like this to help us do so. Emissions trading, if well designed, is the most cost-effective tool that I know to achieve this goal.”
While creating a global market has proven to be a political challenge, localized initiatives have begun to fill the void. For instance, though Canada continues to lag in its development of federal regulations around greenhouse gas emissions, many Canadian provinces are taking action.
For example, Alberta just introduced Bill 3 – the Climate Change and Emissions Management Act – and an accompanying regulation that obliges companies that emit more than 100,000 tonnes of greenhouse gases annually to reduce their emissions intensity by 12 per cent from July 1, 2007.
Critics note, however, that companies can meet their targets by paying money into a technology fund, rather than reducing emissions. Meanwhile, B.C., Manitoba, Quebec and Saskatchewan, along with 31 U.S. states, are part of the Climate Registry – a non-profit organization created to record and track the greenhouse gas emissions of businesses, municipalities and other organizations.
Other major registries/trading schemes/accords taking shape internationally include:
• the Western Climate Initiative, of which B.C. and Manitoba are members, intends to identify, evaluate and implement ways to collectively reduce greenhouse gas emissions and implement a crossborder market-based instrument, likely a cap-and-trade system, to meet ambitious regional emission-reduction goals;
• the European Union Emission Trading Scheme – the largest multinational, greenhouse gas emissions trading system in the world; and
• the Kyoto Protocol’s Clean Development Mechanism (CDM) – a mechanism under the international treaty that gives participating developed nations the option to purchase greenhouse gas reduction credits from projects in developing countries.
Pat Concessi, Global Climate Change leader at Deloitte Touche Tohmatsu, says because these local markets have their own rules, one of the biggest challenges facing the carbon markets is how this patchwork will resolve itself as an integrated model.
The next big step is the UN Framework Convention on Climate Change, taking place in Bali, Indonesia, from December 3 to 14.
With Kyoto’s first phase concluding in 2012, Mr. Marcu says, “We don’t want a gap after the Kyoto Protocol period, and need to find a new agreement.”
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