The Future of Carbon Markets

the future of carbon markets
Wooden blocks with words 'Carbon markets'. By Uuganbayar

In February this year, Washington State held its first carbon auction. The idea, spurred by recent progress in the United State’s climate policy, assists states to begin charging companies for their carbon emissions. This concept serves to encourage decarbonization and the adoption of renewable energy sources. This recent auction could set an example for other states to follow and help accelerate the green transition by making carbon more expensive. 

How Does The Carbon Auction Work?

The auction worked by selling off carbon allowances to companies, making firms pay for emitting carbon, as the U.S. pushes a shift to green. This forms part of a state-wide cap-and-invest program. This program will see limits imposed on greenhouse gas emissions and charge companies that fail to decarbonize. The initiative was launched under the Climate Commitment Act in 2021 and aims to limit emissions. Now, companies in the state that want to continue releasing CO2 from their operations will have to buy pollution allowances at auctions such as this. The alternative is to spend money on adopting renewable energy sources and decarbonization technology to avoid making these carbon payments. 

Firms will still be allowed to emit a certain amount of greenhouse gases each year, set at a limit of 25,000 metric tonnes of carbon. However, if they exceed this amount, they will need to purchase an additional allowance. Companies that fail to comply with the limit can face fines of up to $10,000 per violation per day for noncompliance. The number of allowances sold each year by the state’s Department of Ecology will be limited, to ensure that the carbon being released is limited more and more as Washington undergoes a green transition. 

Let’s Break Down the Recent Carbon Auction

The auction is expected to raise around $1 billion each year, which will be used to accelerate green energy innovation. The first auction attracted $300 million, selling over six million allowances, and three more auctions are set to follow this year. Much of the money raised, around 35%, will go to disadvantaged communities that have been negatively affected by poor air quality. Pam Kiely, associate vice president for U.S. climate at the Environmental Defense Fund explained “Alongside driving deep cuts in climate pollution, the program provides innovative tools to reduce local air pollution in communities that have been on the front lines of environmental harms.” Kiely added, “This dual focus on curbing global climate pollution and local air pollution makes Washington’s program the gold standard for climate policy.”

In the auction, bids came in over three hours, principally from large oil refineries, manufacturers, natural gas companies, and energy providers. But the format differs from a traditional auction. Businesses can connect on an online platform to propose how much they want to pay for each allowance, which equates to one metric ton of CO2 emissions. In addition, bidders are kept anonymous to avoid the potential for price fixing or collusion.

Washington is one of 14 states in the U.S. that is imposing emissions caps. California previously introduced a cap-and-trade system in 2013, and Oregon followed in 2022. New York also plans to follow suit soon. Washington state is planning to reduce its climate targets to 95% lower than 1990 levels, compared to California’s aim of 85% by 2045. However, many other states have failed to introduce carbon caps or hold auctions, and experts believe this system will only apply to certain states. 

Let’s Talk About the Carbon Market

Last November, the federal government launched a voluntary carbon trading market scheme to encourage greater private investment into clean energy projects in developing countries. Some of the main supporters of the scheme, to date, are the Rockefeller Foundation and the Bezos Earth Fund. The U.S.’s climate envoy, John Kerry, hopes the fund will attract trillions of dollars to support the green transition and tackle climate change in poorer countries. The initiative will allow for the buying and selling of climate credits. 

Carbon markets have been criticized in the past for failing to cut emissions. As this new scheme is voluntary, environmentalists worry that it will fail to engage the number of companies needed to bring about real change. Many are also concerned that by calling for private companies to fund the scheme, it will simply shift the burden away from the government, which has repeatedly failed to meet its obligations on climate finance, such as owing money to the Green Climate Fund from a 2014 pledge. Kelly Stone, a senior policy analyst at ActionAid, stated “Carbon markets have historically failed to fulfill climate goals and often profoundly harm communities and undermine human rights.”

However, the politicians encouraging the development of carbon markets believe that innovative techniques aimed at decarbonization are necessary to spur action and include private companies in the green transition. And the carbon credits scheme is catching on worldwide, as the value of the credits being produced and sold is expected to hit $1 trillion by 2037. While many of these schemes have failed in the past, experts are positive that if carbon markets are structured correctly, they could promote climate action. However, the carbon market did not grow in 2022, which suggests there is not enough awareness about the existing schemes, many of which require significant restructuring. 

How Did the Carbon Auction Reflect Decarbonization Efforts?

Washington’s recent carbon auction reflects the national aim of decarbonization, by making carbon emissions more expensive for companies and encouraging an eventual shift to green. In the past, many carbon credit schemes have failed due to poor structuring. However, as governments continue to launch new schemes that can adapt and evolve in line with the expectations of the companies involved, there is real potential for successful carbon markets to be established. 

Author Felicity Bradstock
Author Bio

Felicity Bradstock is a freelance writer specializing in Energy and Industry. She has a Master’s in International Development from the University of Birmingham, UK, and is now based in Mexico City.


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