Concordia 2025

Concordia Winter 2024

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Compliance markets or emissions trading schemes (ETSs) require organisations covered by the scheme to purchase emissions allowances (EAs) on an annual basis – EAs essentially represent the right to emit a tonne of CO2e, and the more you emit, the more emissions allowances you need to purchase. As such, organisations are incentivised to emit less. The oldest and one of the world’s largest ETS has operated successfully in Europe since 2005. The EU ETS adopts a “cap and trade” principle, reducing the number of allowances, or cap, annually in line with the EU’s climate target, ensuring that overall EU emissions decrease over time. By 2023, the EU ETS had helped bring down emissions from European power and industry plants by approximately 47%, compared to 2005 levels (European Commission, 2024). Allowances are sold in auctions and can be traded, and the price of allowances is determined by the market itself (which is subject to robust oversight rules set by the EU) and provides a clear incentive for organisations to reduce their emissions. As the supply of allowances reduces over time, their price should rise, increasing the cost of compliance and thus making the shift to lower carbon alternatives (such as using renewable power or switching diesel HGVs to

electric alternatives) comparatively more affordable for organisations covered by the scheme. In addition, revenue generated from the sale of the allowances in the initial auction is then distributed amongst member states in support of their investment in renewable energy generation, low-carbon technology development and energy efficiency projects, further reducing emissions. 36 ETSs are now in place covering 58% of global GDP, and in 2023 revenue from ETSs surpassed $100 billion (World Bank, 2024). While this sounds promising, only 18% of global emissions are covered by ETSs (Statista, 2024), meaning that the majority of global emissions do not have a market-based mechanism driving progress towards net-zero. This may, in part, be due to the politics associated with drafting and implementing ETS policies which maintain a fair and functioning market and do not stifle economic growth or competition; not to mention other competing sectoral, national and international government agendas. While a further 22 ETSs are under development or consideration (International Carbon Action Partnership, 2024), many organisations and sectors are taking proactive voluntary action.

The voluntary carbon market (VCM) is the second, far smaller side of the carbon market. corporations can choose to purchase carbon credits (again representing one tonne of CO2e) to offset their emissions, perhaps in support of a 2030 net-zero target. Unlike compliance markets (which gives corporations the right to emit a certain volume of carbon) VCM credits are generated by developers who invest in projects which actually avoid, remove or capture CO2 from the atmosphere. This can be through reforestation, afforestation, mangrove conservation, mineralisation, renewable energy generation, the installation of household or community devices (such as clean burning cookstoves) or direct air capture to name a few. One of the major appeals of these projects are the co-benefits. Nature-based projects often have a transformative effect on biodiversity, ecology and local wildlife. In 2023 a total of 246 nature-based projects currently cover a total area of 30 million hectares, roughly the same as Italy’s landmass (IETA, 2023). Many have a significant and immediate impact on people: 2.6 billion people, or 1 in 3 globally, lack access to safe, clean cooking fuels and technology (Clean Cooking Alliance, 2022) and the installation of clean burning cookstoves, funded by the sale of the carbon credits