How the carbon credit markets work
There are several formats and structures of carbon credit markets, which co-exist concurrently. However, they all have the same three goals:
To contain the GHG emission of the planet with positive actions
To penalize companies and countries that emit GHG above the stipulated amount by regulation
To allow building strategic inventory positions by both individuals and companies
Let us begin with regulated markets. In these markets, the government establishes the figure of a regulatory body, which has the function of ensuring compliance with annual GHG emission rules and limits. Each year, the regulator determines a minimum price and annual GHG emission limit that must be followed by all companies. Due to the 2008 global financial crisis, regulated markets crashed and much of the world was deregulated.
In 2017, Europe regulated itself again and today the price of carbon credit in the European ETS is 25 euros (it was 10 euros last year). The regulator has already established a step ladder in which the price of European carbon credit will rise by € 5 to € 10 a year until it reaches € 65 in 2026. Why is this figure 65 euros? Because there are several studies (the main one carried out by the UNFCCC) that conclude that this is the value that would lead the world to offset/neutralize its anthropogenic emissions (those caused by humans). There are other research institutions that mention higher values than 65 euros for the world’s environmental balance. Respected institutes, such as the London School of Economics, for example, work with the hypothesis of 80 dollars in 2030 (11-20 times higher than current sales prices in Brazil) and 180 dollars in 2040.
"Still on the calculation of this equilibrium price, NASA, which has been monitoring the climate in detail for more than 70 years, has studies showing that the research assumptions that established the equilibrium prices made by the UN are out of date and underestimated. In other words, global warming and its consequent symptoms, such as the melting of the polar ice caps, extreme weather events, warming of ocean temperatures, among others, have been much greater than previously expected."
These recent higher-than-expected consequences (and higher impacts than previously projected) are likely to imply an increase in the equilibrium price of carbon credit in the future by climate research institutes.
Around the world, several other markets outside Europe are also regulated and even follow the European Market, such as New Zealand and China (70% of global GDP is regulated today - that is, these countries establish a minimum trading price and GHG emission limits by country and sector). Basically, global society is getting tired of waiting for a global system under UN regulation and global alignment, which has been delayed again and again due to political challenges.
Instead of waiting for a global regulation of Article 6 of the Paris accord, the world has moved to local regulations and a push for voluntary compensation via consumption pressure.
The most populous country in the world and second in terms of global GDP, China, regulated its carbon credit market in 2020. In these markets, each credit represents a ton of carbon, equivalent to the volume of emissions that were avoided in that specific year. All carbon credits are the same around the world, regardless of how they were generated. This is an important concept as it ensures the credibility and eventual fungibility of these credits globally
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