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Climate Change Finance

Explainer: Understanding Carbon Trading and its Rationale

In this explainer, IPS takes a look at carbon emissions trading, which allows an entity, unable to reduce carbon emissions to the required limits, to pay someone who is not only successfully limiting their own carbon emissions but has also gone a step further to remove additional carbon from the atmosphere.

Kenya is home to the world’s first-ever blue carbon initiative that sold carbon credits from mangrove conservation along its vast coastline. Credit: Joyce Chimbi/IPS

Kenya is home to the world’s first-ever blue carbon initiative that sold carbon credits from mangrove conservation along its vast coastline. Credit: Joyce Chimbi/IPS

NAIROBI, May 27 2024 (IPS) - Carbon trading has gained growing popularity on the African continent and is considered by many governments as a viable way to achieve their climate targets while building communities. IPS takes a look at what’s behind the carbon market.

What is carbon trading and where did it come from?

During the United Nations Climate Change Conference in 2015, 196 nations agreed to an internationally binding treaty on climate change known as the Paris Agreement. The agreement was a commitment to limit global warming to 1.5°C by the end of this century. 

A significant rise in global temperatures is a significant threat as it increases the effects of climate change, such as prolonged and severe droughts and deadly floods, like those experienced in Kenya recently, killing people and animals and destroying crops and critical infrastructure.

One of the biggest contributors to global warming or a dangerous rise in temperatures are greenhouse gas emissions, which include carbon dioxide, methane, and nitrous oxide. Carbon emissions are particularly dangerous. These gases are emitted as human beings go about their day-to-day living and business activities, such as driving a vehicle or running factory machines using coal-generated electricity.

The Paris Agreement, therefore, requires that nations make significant efforts to reduce carbon emissions. One of the solutions laid out was carbon emissions trading—those who reduce emissions would receive a financial reward and those that emit would bear a financial responsibility.

Simply put, carbon emissions trading allows you—who is unable to reduce carbon emissions to the required limits—to pay someone who is not only successfully limiting their own carbon emissions but has also gone a step further to remove additional carbon from the atmosphere. A similar approach was deployed in the 1990s to successfully remove sulphur from the atmosphere.

How does carbon trading work?

One of the best ways of removing carbon from the atmosphere is by planting and maintaining mangrove trees, as they capture 3–5 times more carbon from the atmosphere compared to other types of trees.

Kenya has various projects that remove carbon from the atmosphere and receive money for doing so through projects such as the Mikoko Pamoja (Swahili for Mangroves Together) and the Vanga Blue Forest. Mikoko Pamoja project was the first in the world to trade in carbon from planting mangroves.

The Mikoko community plants mangroves and successfully removes at least 3,000 metric tonnes of CO2 from the atmosphere per year. The project started in 2013 and it will continue to capture carbon for trading until 2033, generating an annual revenue of about USD 130,000 from selling all the carbon captured annually.

Internationally recognized scientific methods exist to calculate how much carbon a certain business, activity or project emits and how much carbon a project, like the Mikoko Pamoja, captures in a year.

One tonne of carbon dioxide emitted into the environment is equivalent to one carbon credit. A carbon credit is a permit to emit carbon dioxide. For example, in line with the Paris Agreement, when company X in Europe is unable to reduce their emissions by say 3,000 metric tons, they can ‘artificially’ reduce them by paying for carbon credits from a community in Kenya that is able to reduce emissions and go a step further and remove an additional 3,000 metric tonnes from the atmosphere.

The community is allowed to sell the excess amount of carbon captured, in this case, 3,000 metric tonnes. The principle of selling and buying carbon credits is that the Kenyan community is already living below their emissions, have no obligation to make additional carbon emission reductions, but have been incentivized to remove more carbon from the atmosphere for money.

Company X is therefore punished by having to pay for the carbon they are releasing but at the same time rewarded by having their own carbon emissions wiped off by the carbon removal activities conducted by the Kenyan community.

What is a carbon market?

There are many carbon markets around the world. The kind of exchange of carbon emitted for money described above is conducted through a carbon market called the Voluntary Carbon Market. The community in Kenya planting mangroves to capture carbon uses a middleman or broker to find a market for their carbon and negotiate the best price on their behalf.

The money is deposited into the community’s bank accounts for the community’s development projects. For example, Kenya’s Vanga Blue Forest spans over 460 hectares and is expected to avoid emissions of over 100,379tCO2-eq over a 20-year period.

In sub-Saharan Africa, an estimated 65 percent of carbon credits issued are in the voluntary carbon market, concentrated in just five countries: Kenya, Uganda, Ethiopia, Zimbabwe, and the Democratic Republic of the Congo.

The government of Kenya can enter into a carbon trading arrangement with another government and this bilateral approach is much more lucrative compared to the voluntary approach. The World Bank estimates that one ton of carbon dioxide or one carbon credit would cost between 40 and 80 USD, in line with the Paris Agreement.

Remember, if you—from anywhere in the world—pay for one carbon credit from the Mikoko Pamoja project, you are essentially buying a permit to emit one ton of carbon dioxide.

In 2020, the Vanga Blue Forest received USD 48,713 in exchange for the carbon captured that year.

The voluntary carbon trading sector has grown exponentially and was valued at USD 2 billion in 2022. The players in the voluntary market gathered in Kenya in June 2023 for the world’s largest carbon credit auction event where more than 2.2 million tonnes of carbon credits were sold.

This auction worked the same way as a painting auction works—only that carbon is an intangible commodity. Emitters haggle for the best prices to buy carbon credits or permits to help them wipe off their own emissions—they pay for the permit to emit.

What are the advantages and disadvantages of carbon trading?

Heavy carbon emitters are in the global north. Africa for instance, emits about 3.8 percent of global carbon emissions. Kenya’s alone accounts for less than 1 percent of global carbon emissions.

Some say carbon trading systems are fraudulent—the global North buys the ‘permission’ to continue polluting and the global south receives financial crumbs to wipe off the former’s harmful emissions. They also say carbon markets are a new form of colonialism and a distraction, as heavy emitters continue to emit without making strides to reduce their own emissions. Human Rights Watch has also expressed concern about the rights of an Indigenous community in Cambodia as carbon trading continues.

For others, carbon markets are increasing carbon removal projects while providing the money that developing countries need to accelerate growth and development.

IPS UN Bureau Report

This feature is published with the support of Open Society Foundations.

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