Understanding the Carbon Market to Help Navigate Your Climate Action
Balancing the three pillars of sustainability: people, planet and profit.
Understanding and being able to navigate the carbon market will be key for businesses to create impactful climate action. Whether in a small, medium, large or multinational company, climate action is not only about creating a circular business model and creating environmental and social impact, it’s about survival. Our house — planet earth — is on fire and I want you to panic; these are the opening words of climate activist Greta Thunberg used more than a year ago when she was invited to speak at European Parliament on our climate crisis. The emergency has since been taken seriously by the EU, as it is working to implement the newly introduced European Green Deal, including policies for regional low-carbon economies.
There has undoubtably been widespread awareness among businesses to take action against climate change, but not enough has been done to reduce environmental impacts and truly integrate sustainability into everyday business decisions. Indeed, sustainability will offer a strong hand in future proofing your company. Understanding the carbon market is one of the key factors that will help you navigate your climate action.
How does the carbon market work?
Since the Kyoto Protocol in 1997, industrialised countries agreed to a commitment in which they would work with companies to reduce their greenhouse gas (GHG) emissions. Generally, companies were given a limit on how much GHG they are allowed to emit each year. However, different companies will emit very varied amounts according to their practices, industry and size. Consequently, the European Union (EU) launched the Green Paper, which discussed trading emissions between businesses. With the establishment of the EU’s Emissions Trading System (ETS) in 2005, for the first time GHG were able to be traded in large-scale and the carbon market was formally born. Today, there are various carbon markets developed by other nations, such as Canada, Japan, New Zealand, the United States amongst others. The EU actually allows for collaboration with other cap-and-trade systems if companies qualify for certain conditions.
Essentially, carbon markets enable countries and companies to offset and trade their emission units. Each company is given a maximum allowance in the form of carbon credits. Every 1 unit of allowance equals 1 tonne of CO2 equivalent (CO2e) emissions. According to the Financial Times, the carbon price has soared in 2021, as governments have increased their climate pledges. In fact, since July 2019 the price of carbon has doubled to around £50/tonne today.
With an increasing urgency to take the climate crisis head-on, the carbon market is growing at a strong pace. Since their first launch in the early 2000s, carbon markets have grown to cover around 20% of the global share of GHG emissions. A leading multinational company such as Microsoft can spend $millions in their carbon mitigation. In January 2021 they bought 1.3 million carbon offsets, nearly 85% of which are linked to forestry projects. Nonetheless, Ecofye suggests that whilst planting trees to sequester carbon is a positive climate action, there are several other solutions that can be considered to fight climate change (read more here).
Why should SMEs invest in the carbon market?
As a small or medium sized company you will have huge impact on this race against time. For example, in the UK, SMEs make up 90% of the business landscape, meaning there is great potential to deliver a shift in circularity and social impact. The 2015 Paris Agreement was a historic step in bringing nearly 200 nations to a common cause. Supporting the climate treaty means committing to limit the rise of average temperatures to 1.5 degrees Celsius, which means cutting the current global emissions by 50% by 2030 and reaching net zero by 2050.
Indeed, SMEs play a pivotal role in decarbonisation and actually have the same access to the market as large companies do. As a company founder, director or manager, allowances and carbon credits can be bought in the Voluntary Carbon Market (VCM). Here, you will be able invest in projects or schemes that offer tangible results that ideally not only align with the UN Sustainable Development Goals (SDGs), but also reflect your company’s values. For example, investing in projects that endorse the local economy in the location of your corporate offices or manufacturing is a direct and impactful mitigation to your emissions. Ideally, you will also be investing in quality credits that offer efficient environmental returns.
The best credits you can look for in the VCM are those that directly sequester CO2 from the atmosphere. For example, Mangroves trees can be found in all our continents but in only 15 countries. They inhabit at the edge of land and sea in wetlands and sequester a staggering 1,800 tonnes of CO2e per hectare. This is 3.5 times more carbon than tropical upland forest.
To combat climate change, countries are creating tighter and more demanding regulations under their national determined contributions set under the Paris Agreement. Concrete results and high-quality carbon credits, such as in Mangroves will therefore increase in demand and price. Due to this, it’s important that you reduce your emissions as much as possible before acquiring credits to avoid the growing cost of offsetting. Understanding this and being able to navigate your carbon mitigation to improve your sustainability score is essential in the race to net zero. Companies need to embrace their carbon footprint and see it as an opportunity to provide transparency to stakeholders and and showcase their commitment to reduce their environmental impact. Ultimately, we must find a balance between the three pillars of sustainability: people, planet and profit.
Ecofye helps companies accelerate their climate action. Write to us at hello@ecofye.com for an introduction or visit us on our platform Ecofye+.
