THE CONVERSATION
Published: November 14, 2024
In a world coping with climate setbacks and Donald Trump’s re-election in the United States, the growing prominence of international carbon markets may just be the good news we have been looking for. Canada should take notice.
More than a decade after the collapse of the Kyoto Protocol in 2012, the most recent United Nations Framework Convention on Climate Change (UNFCCC) global Conference of the Parties (COP29) meeting appears to have already seen important breakthroughs. This includes a decision on a new UN carbon offset mechanism under Article 6 of the Paris Agreement, while finalization of rules for emissions trading continue.
Similarly, in North America, voters in the state of Washington rejected a ballot initiative on Nov. 5 that would have revoked the state’s climate mitigation efforts. This paves the way for the state’s planned linkage of its emissions trading system with that of California and Québec.
As the International Carbon Action Partnership reports, emission trading systems are on the rise. New York and Maryland are developing carbon markets that might see advantage in linking with California-Québec-Washington. Looking globally, the same report indicates that a number of emerging economies are also developing emissions trading systems — including India, Brazil and Indonesia.
However, the Canadian federal government’s 2030 Emissions Reduction Plan hardly mentions international carbon markets.
As the world warms, there is an urgent need to discuss how Canada can engage with growing international carbon markets. More than simply a way to bring down the costs of climate change mitigation for Canadians, they are a form of international co-operation. International carbon markets are a means of sharing the cost of climate change mitigation across participating jurisdictions.
Barbados Prime Minister Mia Mottley speaks during a plenary session at the COP29 UN Climate Summit, on Nov. 12, 2024, in Baku, Azerbaijan. (AP Photo/Rafiq Maqbool)
Carbon markets 101
There are two variants of the carbon market, emissions trading and carbon offsetting.
Emissions trading is based on firm-level emission inventories that are aggregated by the government to form a hard cap that is reduced over time. Carbon offsets are individual projects where the project developer argues that emissions will decline relative to a counter-factual baseline scenario. This counter-factual baseline is what emissions would be if the investment into the carbon offset project were absent.
Emissions trading systems allow regulated firms flexibility to reduce emissions at lowest cost. Firms that are able to reduce their emissions below a government-imposed quota— the “cap” — can sell their surplus to firms unable to do so. Governments require that aggregate emissions across firms in a particular jurisdiction decline over time. As such, a price for carbon emerges through this system, measured per tonne of carbon dioxide equivalent (tCO2e).
Firms can trade carbon within the same jurisdiction but different jurisdictions can also link their carbon markets, allowing trading between firms across borders. This is what California and Québec have been doing since 2014.
The costs of reducing emissions varies significantly around the world due to a range of factors. For example, research suggest that the costs of decarbonization are relatively higher in Canada than in the United States. International carbon markets could help spread out these costs. Important differences in the costs of decarbonization globally make the benefits of an interconnected carbon market perhaps even more attractive.
For example, the International Monetary Fund has suggested that the goals of the Paris Agreement might be achieved through introduction of a uniform global carbon price of approximately CDN $104 per tCO2e by 2030. This is substantially lower than the $170 to which the revenue-neutral carbon tax of the federal Canadian government is slated to rise by 2030.
Carbon markets 101
There are two variants of the carbon market, emissions trading and carbon offsetting.
Emissions trading is based on firm-level emission inventories that are aggregated by the government to form a hard cap that is reduced over time. Carbon offsets are individual projects where the project developer argues that emissions will decline relative to a counter-factual baseline scenario. This counter-factual baseline is what emissions would be if the investment into the carbon offset project were absent.
Emissions trading systems allow regulated firms flexibility to reduce emissions at lowest cost. Firms that are able to reduce their emissions below a government-imposed quota— the “cap” — can sell their surplus to firms unable to do so. Governments require that aggregate emissions across firms in a particular jurisdiction decline over time. As such, a price for carbon emerges through this system, measured per tonne of carbon dioxide equivalent (tCO2e).
Firms can trade carbon within the same jurisdiction but different jurisdictions can also link their carbon markets, allowing trading between firms across borders. This is what California and Québec have been doing since 2014.
The costs of reducing emissions varies significantly around the world due to a range of factors. For example, research suggest that the costs of decarbonization are relatively higher in Canada than in the United States. International carbon markets could help spread out these costs. Important differences in the costs of decarbonization globally make the benefits of an interconnected carbon market perhaps even more attractive.
For example, the International Monetary Fund has suggested that the goals of the Paris Agreement might be achieved through introduction of a uniform global carbon price of approximately CDN $104 per tCO2e by 2030. This is substantially lower than the $170 to which the revenue-neutral carbon tax of the federal Canadian government is slated to rise by 2030.
A video explaining how carbon markets work produced by The Economist.
Carbon offsetting, by contrast, tends to be restricted to emissions in sectors that are difficult to measure or in developing countries where there is insufficient capacity for emissions trading. Organizations developing carbon offset projects are usually tasked with collecting baseline information against which the emission reductions of their projects is measured.
The prospect of project developers manipulating baselines continues to raise concerns. However, counter-factual baselines are routinely used in development co-operation.
Political headwinds in Canada
Canadians should seriously consider a carbon market system linked with other jurisdictions — including across Canada, globally and with individual U.S. states.
The Canadian federal government under Prime Minister Justin Trudeau has started to “bend the curve” as Canada’s emissions dropped one per cent from 2022 to 2023. But to reach the federal government’s 2030 emission reduction target of 28 per cent below 1990 levels, Canada will need to reduce emissions at least five per cent year-upon-year through 2030.
Read more: Global carbon emissions inch upwards in 2024 despite progress on EVs, renewables and deforestation
At the same time, support for federal climate policy appears to have declined.
While the growing popularity of the Conservative Party cannot be attributed to any single factor, Pierre Poilievre’s promise to “axe the tax” has resonated. This should not come as a surprise. Public opinion research consistently finds that climate policy support declines as carbon prices rise.
In contrast, there is little noise being made by major political parties in Québec about the province’s carbon market. One reason is that current carbon market prices are half that of the federal carbon tax at $40 versus $80. Many outside of Québec have decried this discrepancy as unfair. But instead, it should rather be seen as politically astute.
Québec has cut its cost of reducing emissions by linking with California, where it is relatively cheaper to do so. Indeed, if one factors in emissions allowances imported from California, then Québec in fact met its 2020 emissions reduction target — reaching 27 per cent below 1990 levels
Emissions in Canada will need to fall much more quickly for Canada to meet its 2030 targets without recourse to international carbon market. (Mark Purdon), Author provided (no reuse)
That being said, some observers have raised concerns about financial outflows from Québec to California. However, Québec firms have, so far, generally supported the carbon market. And for good reason.
Economic modelling suggests that if Québec were to seek to achieve its 2030 emission reduction target unilaterally, without linkage to California, the price of carbon would need to rise to at least $300. That means that Québecers would see the price of carbon paid at the pump rise sharply from the current approximately nine cents per litre to 57 cents. Such a rise would be ripe for political backlash.
That being said, some observers have raised concerns about financial outflows from Québec to California. However, Québec firms have, so far, generally supported the carbon market. And for good reason.
Economic modelling suggests that if Québec were to seek to achieve its 2030 emission reduction target unilaterally, without linkage to California, the price of carbon would need to rise to at least $300. That means that Québecers would see the price of carbon paid at the pump rise sharply from the current approximately nine cents per litre to 57 cents. Such a rise would be ripe for political backlash.
Carbon markets can work
Overall, the Québec experience suggests that international carbon markets can work both globally and here in Canada.
There are legitimate concerns about carbon markets on issues ranging from stifling innovation and “mitigation deterrence” to administrative loopholes as well as moral concerns about “selling out.”
Any serious conversation would have to address these concerns, though many of these are perhaps more down to neoliberal economic policy, which has seen its legitimacy erode significantly. A green industrial policy could help address many of these concerns.
Read more: 3 innovative ways to help countries hit by climate disasters, beyond a loss and damage fund
One idea to build bridges between carbon markets and industrial policy is to introduce carbon price floors. These would allow buyer countries to prevent capital flight, while selling countries can ensure climate finance inflows are priced high enough to lead to transformational change.
International carbon markets are a way for Canada to take responsibility for its emissions while supporting emission reductions elsewhere in the world. It is imperative that whoever is in power in Ottawa in the coming years take them seriously.
Author
Mark Purdon
Professor, École des sciences de la gestion & Holder, Chair in Decarbonization, Université du Québec à Montréal (UQAM)
Professor, École des sciences de la gestion & Holder, Chair in Decarbonization, Université du Québec à Montréal (UQAM)
Disclosure statement
Mark Purdon has received funding from various academic research organizations including SSHRC, IDRC, CGIAR, MITACS, Energy Modeling Initiative, Réseau de recherche en économie circulaire as well as UQAM who has supported the work of the Chair in Decarbonization. He has consulted on issues of climate finance and climate policy with organisations such as the United Nations Development Programme (UNDP), the Canadian International Development Agency (CIDA), Government of Cameroon, The Gold Standard, Transparency International, Equiterre, Ouranos and Government of Quebec.
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