Analysis and News

Carbon Offsets and Net Zero

BY ARMCORE VPI's Analyst: Govindra Raghubansi

If the Paris Agreement's goals are to be met, every industry must play a part in the low-carbon transition. The transition to net-zero energy requires massive sums of cash to be channelled toward decarbonising the economy. The financial sector is not to be excluded and has potential to be a forerunner in the energy transition.

The concept of carbon trading and offsets in finance originated in the 1997 Kyoto Protocol. The Kyoto Protocol acknowledged that industrialised countries have greater responsibility for correcting the current high levels of GHG emissions in the atmosphere, which are the product of almost 150 years of economic activity. The agreement imposed a greater tax on developed countries than on developing countries. The Kyoto Protocol required developed countries to reduce their greenhouse gas emissions, the concept we know of today as carbon trading was created and originally adopted by the EU.

Carbon trading is a market-based mechanism for decreasing greenhouse gases that contribute to global warming, most notably carbon dioxide generated by fossil fuel combustion. An offset is a method of accounting that can be used in balancing the pollution scales. There are two general markets exist in the realm of carbon offsets namely the voluntary market and the mandatory (compliance) market. Companies and governments that are legally required to offset their emissions use the mandatory market. The voluntary carbon market, on the other hand, exists alongside mandatory markets, allowing private firms and people to buy carbon offsets on a voluntary basis. Carbon trading is based on the same principles as stock or commodity trading.

The premier mandatory scheme and the leading carbon reduction mechanism is the European Union Emissions Trading System (EU-ETS); established in 2005 and is currently in its 4th phase.  The EU- ETS has experienced success as it was deemed effective in reducing GHG by the EU. It accounted for almost 90 percent of worldwide value and much of the traded volume contributed a majority of the increased value in 2020. The total value of global carbon markets is pegged at 229 billion euros (277 billion USD), an increase of 20 percent from the previous year due to projected tightening of emissions restrictions (Reuters, 2021). Other significant ETS schemes include the recent China ETS (2021), California ETS, New Zealand ETS, Korea ETS and the Nordic countries ETS.

How does it work?

Firstly, an overall limit or cap on the quantity of carbon emissions permitted is set from major sources of carbon, such as the power sector, automobiles, and air travel. Governments then assign these Carbon permits a monetary value and issue the agreed quota/limit which allows companies to purchase them. When a company buys carbon, it is purchasing the right to emit, but when a company sells carbon, it is selling this right.

If a firm reduces its carbon emissions, the extra permits can be sold on the carbon market to other firms that are not able to upkeep their emission levels and require permits for cash. Conversely, if it is unable to restrict its emissions, it may be forced to purchase further permits. It is for this reason the EU-ETS is called a cap and trade scheme.

The LAC area has lagged in the development of these ETS schemes and other financial mechanisms to combat GHG emissions, only Mexico has attempted to tackle this problem with its pilot ETS system (World Bank, 2020).  The CEPAL in its Carbon Pricing in Latin America- 2019  introduced the ETS and a Carbon tax as policy instruments, a potential means of achieving net-zero. However, there is still plenty of work to be done.  The Caribbean region has made no significant progress in this aspect.

In Guyana there has been attempts to curb GHG with our national development strategies. The REDD+ initiative saw the country receive 250 million USD from Norway for their Carbon offsets and the establishment of the Guyana REDD+ Investment Fund (GRIF).

“Guyana is a carbon sink and we have to leverage assets to bring money into this country to support economic development,” said the Vice-President.

The United Nations' REDD+ initiative, which was established in 2005, is one of the most well-known worldwide offset systems. Its goal is to reduce emissions caused by deforestation and restore natural areas while assisting wealthier nations in staying within their carbon budgets. This is done by channeling funds to poorer countries where these forests are found (FAO-US).

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