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What are carbon markets and why are they the talk of COP25 in Madrid?

What are carbon markets and why are they the talk of COP25 in Madrid?
Copyright Reuters
Copyright Reuters
By Marta Rodriguez Martinez
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Carbon markets or credits are dominating the COP25 climate change conference and have been described as a new kind of neocolonialism. Here is our explainer on what they are and why they are important.


Carbon markets are the controversial concept dominating at COP25, the climate change conference currently happening in Madrid, reports Euronews correspondent Marta Rodriguez.  

What are carbon markets?

The idea behind this system is that the most polluting countries can purchase the right to pollute more from countries that have not reached their emissions limits.

The concept is not new. The 1997 Kyoto Protocol turned polluting emissions into a commodity. For example, the European Union Emissions Trading System (EU ETS) is the largest in the world and has been in operation since 2015.

"Carbon markets are regulatory structures that allow, in particular, oil and gas-intensive companies or heavy industry (or, in the case of COP25, countries) to reduce their economic footprint through a series of incentives," Reed Blakemore, associate director of the US international affairs think tank Atlantic Council, told Euronews.

How do they work?

Some of these markets are designed for trading in "carbon credits". A company or country that exceeds certain carbon reduction targets can buy credits from another that does not exceed them.

"Or, companies can 'offset' carbon emissions through pre-determined contributions to low-carbon projects or the purchase of green bonds," says Blakemore.

Why are they controversial?

What is being negotiated in Madrid, with the implementation of Article 6 of the Paris Agreement, is how to regulate existing markets.

Although neither Fridays for Future nor Extinction Rebellion, two of the main activist organisations behind the COP25 counter-summit, have a joint position for or against carbon markets, their activists largely reject them in a personal capacity.

"In most social climate summit organisations this is seen as one of those false solutions," Isidro Castaner, one of the spokespersons for Extinction Rebellion Spain, told Euronews.

For this activist, the underlying problem with carbon credits is that they perpetuate the dynamic that "everything can be traded and measured from an economic perspective".

"I don't believe in ecological capitalisation," agrees Madalina Scarlat, an activist for Fridays for Future Romania.

Which countries are interested in them and why?

Blakemore points out that carbon markets are very attractive for countries that have difficulty achieving the deep decarbonisation provided for in the Paris Agreement, which commits to keeping the global average temperature increase below 1.5ºC.

"For deeply industrialised countries, economically dependent on oil and gas production, seeking to meet rapidly growing energy demand, or countries so large that large-scale decarbonisation could take longer than is allowed to reach the Paris targets, markets can provide a means to quickly support decarbonisation and minimise economic hurdles.”

These countries are primarily Brazil, India and China. 


"Interestingly, while the United States is in the process of withdrawing from the Paris accords, it also has a significant interest in an international carbon market," he adds.

Why are carbon markets key to the COP25 negotiations?

"COP25 is trying to find a way to link the various existing carbon markets by establishing a set of rules to achieve this," says Blakemore, who believes they will be critical in financing low-carbon projects around the world.

However, there are a number of policy challenges that make consensus difficult. One of them — and one that Brazil is particularly pressing for — is whether old credits can be counted towards the current Paris goals.

"However, there are also thornier questions, such as which projects can be offset or credited, and the need to balance the support of richer countries to help finance low-carbon transitions in the developing world without creating a mechanism that allows the developed world to offload all of its Paris targets into poorer countries," says Blakemore.


Can this trade be seen as a new kind of 'neocolonialism' in which the poorest will maintain the pollution of the richest?

"It is true that a poorly designed carbon market can be enormously inefficient, and it is a particularly difficult task for COP25," says Blakemore, who believes there are enough examples of successful carbon markets around the world to suggest that this is not inevitable.

"The potential for a carbon market not only to facilitate energy transitions and decarbonisation around the world but to be a mechanism for the Paris Agreement to set more aggressive decarbonisation targets is too important to overlook."

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