Carbon markets, also known as emissions trading systems, have evolved significantly over the years, becoming a critical instrument in the global effort to combat climate change. This article delves into the historical development of carbon markets, highlighting key milestones that have shaped their growth and impact.
The concept of carbon trading emerged as a response to the need for cost-effective methods to reduce greenhouse gas emissions. It gained prominence in the early 1990s, partly due to the insistence of the US on a market based approached during international climate negotiations. The trading of sulpher dioxide and nitrous oxides on the US East Coast was very effective in meeting emissions targets to reduce acid rain, which was destroying forests there.
A pivotal moment in the history of carbon markets was the signing of the Kyoto Protocol in 2005. This international treaty set legally binding emission reduction targets for developed countries, known as Annex I parties and introduced the Clean Development Mechanism (CDM) and Joint Implementation (JI) as market-based mechanisms to help countries achieve their targets.
Under the CDM, many climate-positive projects in developing countries earned certified emission reductions (CERs), which could be traded and used by industrialized countries to meet their Kyoto targets.
The EU ETS, launched in 2005, marked the world's first major carbon trading system. It is now in its fourth phase and covers 40% of all EU greenhouse gasses. sets increasingly lower caps on emissions and enables companies (including aviation and shipping) to buy and sell emission allowances as they decarbonise. This cap-and-trade system is widely viewed as successful in driving emission reductions while providing economic flexibility for businesses to alter their fossil fuel intensity. The EU ETS cap on emissions will decrease by 62% by 2030 compared to 2005 levels.
The EU ETS has since continued to inspire the development of emissions trading schemes in other countries. Notable examples include New Zealand's emissions trading scheme, Australia's Carbon Pricing Mechanism, and various regional programs in the United States, most comprehensively in California.
The adoption of the Paris Agreement in 2015 marked another significant milestone. While the agreement did not establish a global carbon market, it encouraged voluntary cooperation between countries and the use of international market mechanisms to achieve emission reduction targets. Article 6 of the Paris Agreement paved the way for a new international carbon market which will allow countries to use the global markets to achieve part of their agreed Paris targets.
In parallel with compliance markets, voluntary carbon markets have emerged from the trading markets under the Kyoto Protocol. These markets allow individuals, companies, and organizations to voluntarily offset their emissions by purchasing carbon credits. The voluntary market provides flexibility and allows businesses and individuals to take immediate action to address their carbon footprint. Some compliance markets accept voluntary market credits and this will increase in the future, meaning that many estimates predict sharp growth for the voluntary trade of carbon emissions. While these markets remain unregulated, projects and their offset tons of carbon must meet strict scientific protocols and be verified by third parties in order to be registered on international registries.
Carbon markets continue to evolve, with new initiatives and carbon pricing mechanisms being explored. Innovations such as blockchain-based carbon trading platforms are gaining traction, offering transparency and efficiency in carbon credit transactions.
The history of carbon markets reflects a growing recognition of the importance of market-based mechanisms in addressing climate change. From the Kyoto Protocol to the Paris Agreement, the development of the carbon markets has been a journey marked by international cooperation, regulatory advancements, and the recognition that putting a price on carbon can be a powerful driver of emissions reductions.
As the carbon markets continue to expand and adapt to the evolving climate landscape, they play a crucial role in helping nations and organizations achieve their emission reduction targets, drive innovation, and transition to a more sustainable, low-carbon future.