A World Economic Forum (WEF) report noted that carbon markets are often underutilized despite perceived corporate enthusiasm. What are some of the assumptions which need a closer examination before rolling out such measures on a mega scale? Can the G20 act as a forum to prepare a concrete roadmap considering India’s focus on climate and environment during its ongoing presidency?
- Market Readiness: The assumption that every region is ready for carbon markets can be flawed. For instance, countries in sub-Saharan Africa might not have the necessary infrastructure or understanding of carbon markets. The 2019 World Bank report shows that only about 20% of global greenhouse gas emissions are covered by carbon pricing initiatives.
- Data Accuracy: The effectiveness of a carbon market rests on the accuracy of emissions data. A company in the EU’s Emissions Trading System (ETS) may have advanced reporting mechanisms, whereas a company in a developing nation might not. To give an example, an issue with China’s national carbon market is the accuracy and reliability of the data, with discrepancies reported in various provinces.
- Price Setting: Pricing carbon appropriately is crucial. Carbon prices vary greatly across different regions; for example, as of my knowledge cutoff in 2021, prices ranged from under $1 per tonne in Mexico to $127 per tonne in Sweden.
- Regulatory Alignment: The notion of regulatory harmony is difficult in practice. An EU company under the ETS might not be able to trade with a Californian company under the Western Climate Initiative due to regulatory disparities.
- Addressing Inequalities: The potential for carbon markets to exacerbate existing inequalities needs to be carefully managed. For instance, countries with lower economic capabilities could be disproportionately affected by the high costs of carbon credits, much like the Global South carrying a larger burden despite contributing less to global emissions.
- Ensuring Compliance: The assumption of universal compliance needs stringent regulation and monitoring. For instance, Australia repealed its carbon pricing mechanism in 2014, showing that compliance over time can be an issue.
The G20, as a leading international forum, could drive the development of a roadmap for carbon markets:
- Establishing a Framework: The G20 could create a standard that considers countries’ readiness levels. For instance, the G20 could implement a phase-wise approach, starting with the most prepared countries.
- Data and Transparency: The G20 could formulate uniform standards for data collection and reporting. As an example, Sweden has a robust reporting system with companies reporting their emissions to the Swedish Environmental Protection Agency.
- Regulatory Harmonization: The G20 could promote regulatory consistency across jurisdictions. For instance, the linking of the EU ETS with the Swiss ETS in 2020 serves as an example of successful regulatory harmonization.
- Addressing Inequality: G20’s roadmap should consider potential inequalities and offer solutions, like financial aid or technology transfer, to help less developed countries participate in carbon markets.
- Compliance Mechanism: G20 could build a stringent compliance mechanism, like EU’s enforcement of penalties in its ETS for non-compliance.
- Capacity Building: Lastly, G20 could offer assistance to less prepared countries. An example is the UN’s capacity-building initiatives, which provide technical support to countries in need.