Carbon markets are advancing on a global level, following the first country-to-country trades at COP27. The Energy Podcast investigates how carbon pricing works and examines what role it can play in the race to reduce greenhouse gas emissions.

Presented by Julia Streets. Featuring Dr Hasan Muslemani from the Oxford Institute of Energy Studies, Andrea Bonzanni from the International Emissions Trading Association and Shell’s senior carbon pricing policy advisor, Dr Malek Al-Chalabi. With additional contribution by Stephen Kansuk, Head of Environment and Climate Change at the United Nations in Ghana.

The Energy Podcast is a Fresh Air Production for Shell, produced by Annie Day and Sarah Moore, and edited by Molly Lynch and Sophie Curtis.

EPISODE TRANSCRIPT:

00:00
Julia Streets: Today  on  The  Energy  Podcast...

MUSIC BED COMES IN

Andrea Bonzanni: Emissions must be reduced globally irrespective of where they take place. The atmosphere is one at the end of the day. Article VI allows reducing emissions where it’s more efficient.

Dr Hasan Muslemani: We have solutions that are being praised as the holy grail of net- zero… The issue is that we need all the solutions that we can get because in the fight against climate change, we are really in a race against time.

Julia Streets: The  cost  of  climate  change.  It's  a  phrase  commonly  used  by  governments,  companies,  and  campaigners  across  the  world  when  discussing  the  need  to  limit  global  warming  to  well  below  two  degrees  Celsius.  Quantifying  the  exact  cost  of  far- reaching  effects  of  climate  change  is  not  an  easy  task.  But  putting  a  price  on  emissions  is  viewed  by  many  as  an  effective  means  to  help  drive  down  levels  of  CO2  in  the  atmosphere.  The  idea  is  simple.  Putting  a  price  on  carbon  emissions  creates  a  financial  incentive  to  reduce  them.
Carbon  markets  have  existed  for  decades.  There  are  many  carbon  pricing  systems  around  the  world,  but  at  present,  it  is  estimated  that  only  a  quarter  of  emissions  are  priced.  That  could  soon  change.  At  last  year's  COP27  climate  conference  in  Egypt,  the  first  country- to- country  carbon  trades  took  place.  Could  this  pave  the  way  for  further  uptake  of  carbon  trading  and  what  impact  could  that  have  in  the  fight  against  global  warming?

Hello,  I'm  Julia  Streets,  and  today  on  The  Energy  Podcast:  How  can  carbon  markets  limit  climate  change?

MUSIC ENDS  

With  me  to  discuss  this  are  Andrea  Bonzanni,  who's  the  international  policy  director  at  the  International  Emissions  Trading  Association,  who  you  may  well  remember  from  a  previous  episode  of  The  Energy  Podcast.  He  is  joined  by  Dr.  Hasan  Muslemani, who is  the  head  of  Carbon  Management  Research  at  the  Oxford  Institute  for  Energy  Studies.  And  our  third  guest  is  Dr.  Malek  Al- Chalabi,  who  is  a  senior  carbon  pricing  policy  advisor  at  Shell.

Hasan,  perhaps  I  could  start  with  you.  For  the  benefit  of  the  audience,  would  you  just  mind  explaining  what  we  mean  when  we  talk  about  carbon  markets?

02:18
Dr. Hasan Muslemani: The  fundamental  concept  behind  a  carbon  market  is  really  to put  a  price  on  carbon,  or  in  other  words,  to  quantify  the  cost  of  damages  that  emissions  will  cost  our  society  over  time.  To  do  this,  we  have, at  the  heart  of  carbon  markets,  what  is  called  carbon  accounting  or  greenhouse  gas  accounting.  This  represents  a  set  of  standards  and  methods  that  help  us  quantify  but  also  verify  the  impact  that  each  business  creates  on  the  environment,  and  this  impact  is  reported  in  terms  of  tons  of  CO2  emitted.
 Now,  something  that  I  really  want  to  emphasize  here  is  that  today,  we  speak  of  carbon  markets,  but  we  need  to  differentiate  between  two  different  types  of  markets.  The  first  is  what  we  call  a  compliance  market,  which  is  a  market  that  is  heavily  regulated  and  corresponds  to  a  specific  region  or  jurisdiction,  and  where  companies  within  that  jurisdiction  have  to  take  part  in  the  market.  The  other  one  is  a  voluntary  one.  This  is  a  lot  less  regulated  and  where  participation  is  voluntary,  as  the  name  implies.  The  voluntary  carbon  market  is  based  on  the  concept  of  offsetting.  That  is  where  a  company  wishes  to  mitigate  or  neutralize  its  own  emissions.  So,  it  goes  out  and  invests  in  projects  which  are  reducing  equivalent  amounts  of  emissions  elsewhere  in  the  world.

03:30
Julia Streets: Can  you  talk  to  us a little bit about how  they  work  in  practice  in  everyday  terms?

03:36
Dr. Hasan Muslemani: Starting  on  the  compliance  markets, and  the  objective  is  really  to  put  a  price  on  carbon,  there's  two  different  ways  to  do  this.  The  first  one  is  carbon  taxation,  which  should  be  a  simple  concept.  We  have  countries  like  Norway  and  Denmark,  which  would  impose  a  specific  tax  on  every  ton  of  CO2  that  a  company  would  produce  within  those  countries.  The  key  here,  really,  is  for  that  carbon  tax  to  be  high  enough  to  incentivize  businesses  to  change  behavior  or  to  move  to  greener  production.  This  is  essentially  a  stick  form  of  regulation  where  businesses  have  to  lower  their  emissions  or  face  an  additional  cost.
 The  other  mechanism,  which  is  a  cap  and  trade  mechanism,  which  is  the  more  familiar  one,  and in  this  system  we  have  an  authority,  say,  the  European  Commission,  which  sets  a  cap  on  how  much  emissions  can  be  generated  as  a  whole  within  the  continent,  within  Europe,  and  then  allocates  a  number  of  allowances  or  carbon  credits  to  European  countries  and  companies  for  them  to  trade  amongst  each  other.  Here,  each  carbon  credit  or  allowance  is  representative  of  one  ton  of  CO2.
 This  allocation  process,  what  I  want  to  note,  is  done  using  the  historical  emissions  of  each  one  of  these  companies.  This  is  a  process  that  we  call  grandfathering.  The  overall  cap  is  reduced  each  year  in  order  to  meet  a  certain  European  climate  target  in  the  future.  The  way  this  works  is  where  companies  that  have  lowered  their  emissions  below  their  targets,  now  they  have  surplus  of  allowances,  which  they  can  go  into  the  market  and  sell  to  companies  that  did  not  do  so  well  and  will  require  to  buy  credits.  So,  this  mechanism  really  is  sort  of  a  carrot  but  also  a  stick  sort  of  regulation.

05:12
Julia Streets: Thank  you  for  explaining  how  they  work.  I  suppose  my  next  question,  is  how  effective  are  they  proving  to  be?

05:19
Dr. Hasan Muslemani: The  longest  running  and  actually  the  biggest  ETS  in  the  world,  that  is  the  EU ETS  or  emission  trading  scheme.  This  has  started  in  2008  and  has  gone  through  different  phases  over  the  years.  But  I  do  want  to  mention  that  it  has  suffered  from  a  number  of  setbacks  over  those  years.  To  give  an  overview,  the  carbon  price  at  the  beginning  was  around  30  euros  per  ton,  but  that  price  has  crashed  to  less  than  5  euros  around  the  financial  crisis  of  '09.  This  was  most  likely  because  of  two  main  reasons.  The  first  one  is  that  companies  had  to  report  their  emissions  in  such  a  regulated  manner  that  they  have  not  done  before,  and  so  they  might  have  overestimated  how  much  emissions  they  emit  and  hence  how  much  allowances  they  eventually  received  from  the  system.  But  also,  because  of  the  financial  crisis  itself,  it  meant  that  business  offices  aren't  lit,  emissions  aren't  as  high  as  usual,  so  they  did  not  need  to  surrender  as  much  allowances  at  the  end  of  the  compliance  phase,  which  eventually  meant  there's  an  oversupply  of  credits  in  the  market,  and  so  the  price  has  crashed.
 The  good  news  is  the  EU ETS  has  gone  through  sort  of  a  recovery  mode  over  the  past  10  years,  and  today  the  price  has  not  only  recovered  but  reached  the  level  which  is  believed  to  incentivize  most  sectors  to  lower  emissions,  and  that  level  is  around  100  euros  per  ton.

06:41
Julia Streets: It's  been  so  helpful  to  get  a  sense  of  progress,  thinking  about  the  dynamics  of the  market  since  launch,  and  also  to  think  about  the  market  share.
 Andrea,  let  me  bring  you  in  here  because  this  is  about  the  world's  attempts  to  limit  global  warming  to  well  below  two  degrees  Celsius,  in  line  with  the  Paris  Agreement.  Are  we  likely  to  see  the  growth  of  carbon  markets  in  pursuit  of  this  great  ambition?

07:03
Andrea Bonzanni: Well,  we  know  that  meeting  the  goals  of  the  Paris  Agreement  requires  a  radical  transformation  of  many  areas  of  our  economies  and  our  lives,  and  for  the  reason  outlined  by  Hasan,  carbon  markets  and  carbon  pricing  in  general  are  one  of  the  tools  that  governments  are  increasingly  considering.  Carbon  markets  are  spreading  from  a  core  of  rich  runs  economies  such  as  the  EU,  California,  South  Korea, and  New  Zealand,  to  middle- income  and  emerging  countries.  This  year,  we  had  Mexico  and  Indonesia  launching  their  emission  trading  systems,  and  the  two  schemes  are  expected  to  expa