RevIeW Article t From kiosks to megastores: The evolving carbon market by Deb Niemeier and Dana Rowan Markets can play a key role in mitigat- ing the effects of climate change by UN Photo/Mark Garten providing added flexibility, allowing emissions reductions to occur at a lower cost while maintaining a set level of emissions reductions. With careful regulatory design, both indus- try and consumers can benefit from low costs. We review the state of car- bon trading globally and in the United States, the West and California. New policies and regulations related to AB32, which mandates reductions in California’s greenhouse-gas emissions to 1990 levels by 2020, are beginning Globally, carbon trading is expanding rapidly as a means for using markets to reduce to take shape. California has a unique greenhouse-gas emissions. In December 2008, Secretary-General Ban Ki-moon opened the United Nations Climate Change Conference in Poznan, Poland. opportunity to establish a new ethos for carbon trading by acknowledging trading is substantially greater in the projects certified under the Kyoto unavoidable mitigation costs, and by former than in the latter (fig. 1). Both Protocol, a 1997 international treaty to designing a market-based solution types of markets trade in greenhouse- reduce greenhouse gases. that is fair, equitable and transpar- gas emissions, which include carbon The voluntary carbon market in- ent, and protects the most vulnerable dioxide, methane, nitrous oxide, sulphur cludes the Chicago Climate Exchange, hexafluoride, hydrofluorocarbons and which allows businesses to voluntarily members of society. perfluorocarbons, and are measured in set a reduction target and trade emis- carbon dioxide equivalents (CO2e). sions or buy offsets. Individuals and he carbon market is growing expo- When regulated entities are subject businesses can also purchase retail nentially; at $30 billion, worldwide to greenhouse-gas limits, those emit- “over-the counter” greenhouse-gas- tradingT in 2006 was nearly triple that ting less than the cap can theoretically emissions offsets, such as TerraPass. observed in 2005. A carbon market is trade with those emitting above the cap. The voluntary market, which has been created when an emissions cap is set — Carbon trades can also occur with off- referred to as “the Wild West” of offset either through a political or regulatory set projects that reduce emissions from trading (Fahrenthold and Mufson 2007), process — and an emissions allowance unregulated greenhouse-gas-producing currently transacts about 24 MMtCO2e, is then passed down to regulated enti- activities (such as capturing methane and this amount is projected to roughly ties. If the total carbon emissions pro- from cows in California and using it to double by 2011. duced by a company exceeds its cap (or produce electricity), or via unregulated Carbon market history allowance), then the company must pur- carbon-sequestration activities (such as chase credits (or allowances) from those planting trees in Brazil). Voluntary emissions reductions polluting less than their allowance; this The regulated carbon market and offsets can be traced back at transfer is known as a carbon trade. In transacts about a million metric least 20 years, driven by the desire theory, carbon markets allow companies tons of carbon dioxide equivalents to reduce greenhouse-gas emissions to choose least-cost methods of com- (MMtCO2e, the standard measure- in the absence of formal regulations. pliance, which results in a net societal ment for amounts of greenhouse gases Nonetheless, the decision to allow off- financial gain when overall emissions emitted into the environment) annu- sets is separate from the decision to im- are reduced to the desired level. Today’s ally, and includes the European Union pose a regulatory cap. In addition, the carbon market can be loosely organized Emissions Trading Scheme, the United types of projects allowed as offsets and into the regulated (or compliance) mar- Kingdom Emissions Trading Scheme, the criteria by which they are evaluated ket and the voluntary (or noncompli- the New South Wales Greenhouse are also policy decisions. When credits ance) market; the volume and value of Gas Abatement Scheme, and offset are generated through offset invest- 96 CALIFORNIA AGRICULTURE • VOLUME 63, NUMBER 2 ments, the transaction costs — the costs of providing the services, information Carbon markets and enforcement required to support $30,098 million a trade — may be much higher than anticipated and are directly related to policy decisions about how to evalu- ate and monitor projects over time (Michaelowa and Jotzo 2005). With the right price signals, both industry and Voluntary market consumers generally benefit from more Regulated market $91 million cost-effective emissions reductions, $29,980 million 23.7 MMtCO2e which might include purchasing or fi- 1,629 MMtCO2e nancing offsets (Wara 2007). The Kyoto Protocol was instrumental in establishing the necessary foundation for carbon markets to develop. Adopted CCX Retail in 1997 at the Third Conference of the $38 million $59.4 million Parties of the United Nations Framework 10.3 MMtCO e 13.4 MMtCO e EU ETS Kyoto CDM/JI 2 2 Convention on Climate Change, the $24,357 million $4,954 million (Allowances) (Project-based) Kyoto Protocol requires that Annex I 1,101 MMtCO2e 466 MMtCO2e nations reduce their greenhouse-gas (Allowances) (Project-based) emissions to 5% below their total 1990 levels over the 2008-to-2012 commit- ment period. Annex I nations include MMtCO2e = million metric tons carbon dioxide equivalents industrialized countries that were in the Organization for Economic Co- Fig. 1. Market trading, 2006. Total carbon market includes smaller market trades not shown; operation and Development (OECD) regulated market includes New South Wales and the U.K. emissions Trading Schemes (eTS). Kyoto CDM/JI = clean development mechanism/joint implementation; CCX = Chicago in 1992, such as the United States, the Climate exchange. Adapted from Capoor and Ambrosi 2007; Hamilton 2007. United Kingdom and countries in the European Community. They also in- clude countries with economies in tran- In nations such as the United States another Annex I party that does not sition (EIT parties) such as the Russian that have not yet ratified the Kyoto expect to meet its assigned target. Federation, the Baltic States, and several Protocol, and so are not bound by it, Joint implementation. Second, the Central and Eastern European states. greenhouse-gas emissions regula- Kyoto Protocol also allows carbon cred- Certain developed nations (OECD mem- tions and trading mechanisms are its from project-based offsets. Article 33 bers but not EIT parties) contribute to also being established at subnational (UNFCCC 1998) allows project-based an adaptation fund to be used in non– scales. These include upcoming limits credits for avoided deforestation, refor- Annex I (developing) nations such as in California and the Northeastern estation and afforestation, which entails China, India and Mexico. The purpose states. In the meantime, unregulated planting forests in places that have not of the adaptation fund is to provide parties, from industries in nonratify- been forested for at least 50 years, to financial assistance to developing coun- ing nations and non–Annex I nations increase carbon stored in or decrease tries that are particularly susceptible to to individual consumers worldwide, carbon released by soils and trees. the effects of climate change, helping still look to a growing voluntary trad- Under Article 3.4, forest, crop and graz- them to address adverse impacts. ing market to mitigate climate change. ing land management can be used to The protocol includes provisions for generate carbon offsets (UNFCCC 2002). Regulated carbon markets trading emissions credits as a mecha- Joint implementation allows an Annex nism to reduce greenhouse-gas abate- Under the Kyoto Protocol, Annex I I party to develop and implement an ment costs, though member states can member states can meet their assigned emissions reduction (or sink) project meet their targets with any combina- targets in three ways: in another Annex I party’s territory tion of direct regulation, incentives, Emissions trading. First, when and receive credit (emission reduction taxes or cap-and-trade. By Oct. 23, 2007, greenhouse-gas allowances are ex- units [ERUs]) toward its own target. 175 countries had ratified the Kyoto changed by emissions trading, an Most joint implementations to date have Protocol (UNFCCC 2007), providing Annex I party that is under its as- targeted economies in transition, but much of the world with a formal mech- signed target may transfer those excess recently a New Zealand wind farm was anism to regulate and trade emissions. credits (or assigned amount units) to implemented jointly. http://CaliforniaAgriculture.ucop.edu • April–June 2009 97 TABLe 1. early greenhouse-gas offset projects Start date Sponsors Location Type Original mitigation estimate MMtCO2e 1989 Applied Energy Services, CARE Guatemala Forestry, agroforestry 60 1990 U.S. Forest Service United States Tree planting (private land) 59–238 1991 World Bank, Global Environmental Facility (GEF) Philippines Geothermal energy —* 1991 UN Development Program, GEF Zimbabwe Photovoltaic energy — 1992 Face Foundation, Innoprise Corp. Malaysia Enrichment planting, forest rehabilitation, 15.6 sustainable timber * Data unavailable. Clean development mechanism. Chicago Climate Exchange. In the in Guatemala.