To get to net zero, we need an effective global carbon credit market

The carbon trading system agreed in Glasgow will help with the visibility of carbon pricing but more needs to be done

As carbon pricing becomes more widespread, global collaboration is needed to avoid carbon dumping and tackle broader economic implications such as inflation

3-MIN READ3-MIN

A person wearing a mask depicting Britain’s Prime Minister Boris Johnson protests during COP26 in Glasgow, Scotland, on November 12. An effective carbon trading system is a necessary tool in the transition to a net-zero economy. Photo: Reuters

Chris Iggo

Chris Iggo is chair of AXA Investment Managers Investment Institute and chief investment officer of AXA IM Core.

Published: 2:30pm, 17 Nov 2021

One of the more important agreements made in Glasgow at the COP26 summit on climate change was on a global system for trading carbon. Under the auspices of the United Nations, the system will provide for the allocation of carbon credits linked to projects and activities that reduce greenhouse gases – for example, renewable energy plants or the cultivation of forestry land.

These credits will be set against a country’s emission-reduction targets and/or sold to raise finance, providing an offset to carbon emissions in another country. Essentially the agreement provides a framework for a global carbon market, which will facilitate cross-border green financial flows and provide more visibility on the price of carbon.

To illustrate simply how the system would work, we can imagine a new wind-turbine power plant being built in country A to replace an old coal-fired power station. The switch might reduce carbon dioxide emissions by 100 tonnes.

Once verified, country A would be granted 100 carbon credits which could directly be set against its nationally determined contributions (NDCs) – the system developed by the UN to track global emission plans on a country-by-country basis to determine whether, collectively, we are on track to stop global temperatures from rising by more than 1.5 degrees Celsius by 2050.