Pay to pollute: Nations warm to carbon market idea

System of emissions trading gains traction ahead of UN climate meeting in December

A view of the cooling towers of a coal-fired power station in England on Sept 25, 2015.
A view of the cooling towers of a coal-fired power station in England on Sept 25, 2015. PHOTO: AFP

NEW YORK • The world is coming to terms with the idea that a price on carbon emissions is necessary to fight global warming. Now there is a growing consensus on how to make it happen. Cap and trade.

After years of political defeats and operational snafus, systems that let companies buy and sell the right to pollute are gaining traction as a way to reduce emissions without dragging down the economy. With less than two months before nations are expected to finish a binding global deal to rein in greenhouse gases, Japan, South Korea and dozens of US states, as well as Ontario and Quebec in Canada, are among governments coming out in favour of these carbon markets.

"While emissions trading was for some time only a European thing, times have changed,  and we have an increasing number of national and regional schemes," said Mr Ingo Ramming, the London-based co-head of commodity solutions at Commerzbank.

"We believe that this trend will continue; carbon pricing and emissions trading will play an increasingly important role."

China, the world's biggest polluter, last month reiterated its plans to introduce a nationwide emissions trading system as early as 2017. That has raised hopes that the world will end up with at least a patchwork of pollution markets, though not the global system proponents once hoped for.


We see a carbon price as a mechanism for driving innovation.''

MR GLEN MURRAY, Ontario's environment minister, on how to cut emissions without dragging down the economy

The announcements come before a United Nations meeting in Paris in December, where almost 200 countries are expected to sign a pact to cut carbon dioxide and other pollutants blamed for global warming. The deal is not expected to include specific policies to achieve this, and many governments have been considering two main options: carbon markets or taxing emissions.

Businesses have touted trading as a cost-effective way to shift the world away from fossil fuels, one that encourages companies to find the cheapest way to cut emissions. That is emerging as a key selling point over taxes, which can be simpler to impose but do not offer the same incentive to innovate, according to proponents.

Worldwide, carbon markets reached US$34 billion (S$48 billion) in volume last year, up US$2 billion from the year before, according to the World Bank.

"We see a carbon price as a mechanism for driving innovation," Mr Glen Murray, Ontario's environment minister, told a conference on emissions trading in New York last month. "We now have a critical mass of governments. We've passed the tipping point."

Pollution markets, often referred to as cap-and-trade systems, typically put a total limit on emissions and then let companies buy and sell permits for each tonne of greenhouse gas they release.

The idea is not new, and emissons trading was a key part of the global warming treaty approved in Kyoto, Japan, in 1997.

A national emissions market would be "the preferred approach", said US Energy Secretary Ernest Moniz this month. However, he said, it is "a pretty safe bet" that Congress would not approve such a system, and the United States is, instead, relying on policies that can be implemented by state and federal agencies without legislation.

Including taxes as well as trading, 39 nations and 23 sub- national governments now impose a price on carbon, the World Bank said in a report last month. They cover about 12 per cent of global emissions, up from 4 per cent a decade ago.

The bank is helping 17 countries explore their options, including potential markets in Morocco and Thailand, according to vice-president Rachel Kyte. "We've gone from whether or not to put a price on carbon to how and when," she said in an interview.


A version of this article appeared in the print edition of The Straits Times on October 13, 2015, with the headline 'Pay to pollute: Nations warm to carbon market idea'. Print Edition | Subscribe