Can Carbon Trading stop Global Heating? Sarah Razak and Jomo Kwame Sundaram

As our planet continues to heat up at an alarming rate, carbon credits, markets and trading have been promoted as effective measures to combat global warming. While there is an urgent need to curb planetary heating, growing reliance on this innovation is problematic, to say the least.

Global warming occurs when heat from the sun is absorbed by greenhouse gases (GHGs) such as carbon dioxide (CO2) and methane. Like a blanket, GHGs trap heat, preventing it from escaping our atmosphere. This raises temperatures on Earth, accelerating climate change and triggering extreme weather events such as droughts, cyclones and floods.

Historically, human activities – including deforestation and fossil fuel burning – have released CO2 into the atmosphere, increasing the already huge accumulation of emissions. Continuing GHG emissions are now making this problem worse.

Market solution?

Carbon trading has been touted by some economists as the best, fairest and most efficient solution to mitigate global warming. The basically simple market-based idea behind carbon trading is appealing – companies will stop emitting as they must pay to release GHGs by buying ‘carbon [dioxide-equivalent] credits’.

With carbon trading, companies are rewarded for releasing less GHGs. Such companies can sell their extra carbon credits to other companies exceeding their credits, who must thus pay to release more GHGs.

Correctly pricing such credits is thus crucial for the efficacy of the mechanism. But carbon trading promoters tend to under-price credits for carbon trading to gain more acceptance and support.

Thus, this approach treats the Earth’s capacity to absorb CO2 as a service to be bought and sold while ignoring its other all too real implications. Worse, quotas are often arbitrarily set, without rewarding low emitters of the past and present.

Dubious equivalence

There are many GHGs – including methane, nitrous oxide, and others – of which the most important is CO2. The notion of carbon [dioxide] equivalence had to be created to create a market for GHGs’ estimated carbon equivalents (CO2e), ostensibly measured by their global warming potential relative to CO2.

Thus, CO2e has become the ‘universal’ measurement unit for carbon trading, functioning like a common currency. However, the CO2e yardstick for GHG trading is problematic as such measures rely heavily on assumptions and estimates.

Carbon markets and trading – based on such equivalence – have, in turn, led to misleading estimates and interpretation. The resulting poor policy analysis, formulation and efficacy undermine efforts to address global warming more effectively.

Due to the complex and changing properties of gases, CO2e estimates have been subject to many revisions. In 1996, the Intergovernmental Panel on Climate Change (IPCC) declared one unit of hydrofluorocarbon (HFC-23) gas had a global warming potential equivalent to 11,700 units of carbon dioxide (CO2e) over a 100-year period.

In 2007, HFC-23’s CO2 equivalence was revised upwards to 14,800 CO2e. But the IPCC noted even this huge revision upwards remained subject to a huge margin of error of plus or minus 5000 CO2e units.

CO2e is also complex to navigate as different GHGs have different properties. For example, HFC-23 has a stronger warming effect than CO2 in the short-term. Thus, using a common yardstick for these two very different gases – as is commonly done – is not only scientifically moot, but also analytically misleading.

Carbon markets delay action

Unsurprisingly, carbon trading’s premises remain controversial. After all, carbon trading does not actually reduce GHGs, but merely discourages increasing emissions by imposing the costs of buying credits. Thus, instead of cutting GHG emissions, companies can buy carbon credits, fostering an illusion of progress.

Those buying carbon credits may believe they are thus reducing GHG emissions. But in fact, emissions do not decline much. Worse, companies may believe they are fully compensating for all the negative consequences (‘externalities’) of emitting GHGs by buying carbon credits. But this is an illusion.

High GHG emitters do not actually have to make much effort to cut emissions. Buying carbon credits, ostensibly to compensate for their GHG emissions, has thus become a low-cost, low-effort alternative to investing in less GHG-emitting technologies.

Unsurprisingly, most major emitters prefer the cheaper option of carbon trading over such transformative investments. Real investments in better technologies typically require significant upfront costs, while the financial returns to such investments are almost never immediate.

Companies have every incentive to indefinitely postpone major efforts to cut GHG emissions by participating in carbon trading. Thus, carbon trading effectively delays – rather than accelerates – needed transitions to renewable energy technologies.

‘Carbon offsets’ offset action

Companies can earn carbon credits for doing ‘climate friendly’ projects – such as reforestation – to offset the harm done by GHG emissions. These projects are supposed to compensate for the harm caused by GHG emissions, ostensibly offsetting companies’ adverse environmental impacts.

While planting trees can absorb CO2, it does not immediately eliminate accumulated CO2. A significant time lag occurs as growing trees need time to increase their capacity to absorb CO2, and thus reduce atmospheric CO2 levels.

The rate of CO2 emissions release into the atmosphere exceeds the rate at which CO2 is naturally absorbed by natural sinks like forests, including offset projects. This imbalance has contributed to an accelerating increase in long-term GHG accumulation levels in the atmosphere.

Although carbon trading may help reduce growing emissions at the margin, it has not significantly reduced accumulated CO2 in the atmosphere. The time lags involved further diminish its net contribution, and certainly do not offer the urgent solutions needed.

By purchasing carbon credits from such projects, many think they are thus offsetting their GHG emissions. But there is no empirical evidence that such offset projects actually reduce GHG emissions, i.e., carbon trading is not even ‘net-zero’.

Holistic approach needed

Unsurprisingly, carbon credits, markets and trading have fostered a false sense of progress. Most problematically, it has delayed the urgent need for an accelerated transition, especially to far more renewable energy generation and use.

To more effectively address the challenges of global warming, we need to move beyond carbon trading to a more comprehensive approach prioritizing more urgent, effective and impactful adaptation and mitigation efforts, including renewable energy generation and use.

Sarah Razak and Jomo Kwame Sundaram work at the Khazanah Research Institute in Kuala Lumpur.

(This article was originally published in Inter Press service (IPS) news on July 12, 2023)