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Businesses prioritize carbon markets to combat climate change

Pricing harmful carbon through dedicated marketplaces is emerging as businesses' preferred way of tackling climate change. It is also the cornerstone of EU policy, but critics say that alone won't be enough.

"We know who the enemy is, it is carbon," Angel Gurria, secretary general of the Organization for Economic Cooperation and Development (OECD) said at the recent Paris Business and Climate conference.

"We should hit it on the head with a blunt instrument as hard as possible ... a big fat price."

Ahead of the

Paris climate summit

in the autumn,

Europe's big energy companies have chimed in

, with the likes of BP, Royal Dutch Shell, Total and Statoil amongst others demanding a global price on carbon in a letter to the UN's top climate official, Christiana Figueres.

While Greenepace has dubbed the proposal a "smoke screen" Sandrine Dixson-Declève from the University of Cambridge Institute for Sustainability Leadership told DW that it showed that energy firms were taking a pro-active approach and that the mindset was changing.

"The mood was the most positive I've ever seen," she says, referring to two conferences on business and climate change, and carbon pricing she had just come back from.

Changing mindset

"Most of the business community, including the financial community, have declared that we need the right carbon pricing mechanisms", adding that "it is one of the major pillars of being able to move fast towards a low-carbon economy."

She says it is not even "questionable" anymore whether carbon pricing should occur, but rather "what does the price need to be in order to really catalyze transitioning to a low-carbon economy."

The price, she admits is far too low at present, around $7 (6.4 euros) on average globally. Experts say it should be at least $20, some say it should be between $50 and $100 to really further decarbonization, meaning the process of achieving a zero-emissions economy.

Deutschland 6. Petersberger Klimadialog in Berlin (Greenpeace Demonstration)

Merkel and Hollande have stressed the importance of carbon markets

But what are the right pricing mechanisms? In their letter to the UN's Figueres, the six energy giants say they favor having carbon markets across the globe, where emissions can be traded. It "allows countries that have emission units to spare - emissions permitted them but not "used" - to sell this excess capacity to countries that are over their targets," according to the 1997 Kyoto protocol, where the concept first took shape.

The EU introduced the world's first emissions trading scheme (ETS) in 2005, as one of the main pillars of its climate policy. But it has been under fire lately as the price of carbon has dropped due to an oversupply of allowances on the market. It means that burning fossil fuels like coal has become cheap, defeating the purpose of the ETS.

Last month, the EU reacted by agreeing to withdraw some of the surplus allowances from the market and putting them in reserve.

But "once these surplus allowances are brought back to the market again, it allows companies to pollute more in the future," Femke de Jong, police officer at NGO Carbon Market Watch told DW.

"So, what we as NGOs are saying is to permanently remove surplus pollution rights. We currently have more than 2 billion, it's expected to grow to 4 billion by 2020 - it's two times the cap on the EU ETS."

"It's very strange to see that EU leaders have said the ETS is the cornerstone of our climate and energy policy even though it hasn't worked so far," she says, adding that there is a lot of funding, among others from the World Bank, going to places like China to set up similar schemes.

And indeed, the World Bank recently said that any agreement reached in Paris should send an "unequivocal signal" that markets would play a key role in tackling climate change.

In June 2014, its initiative on carbon pricing stated that "businesses see that carbon pricing is the most efficient and cost effective means of reducing emissions."

It estimates that emissions trading schemes were worth $34 billion on April 1 this year, up from $32 billion in 2014.

ETSs work in progress

Sandrine Dixson-Declève, who was involved in the World Bank's initiative on carbon pricing, says ETSs are "no panacea" but that countries like China, South Africa, Mexico and the US state of California had learnt from the original EU scheme and implemented changes, like setting a minimum price and not flooding the market with too many allowances.

China Umweltverschmitzung 03.05.2014

China wants to learn from the EU's ETS teething problems

She also says energy intensive companies and sectors have been forced to tackle greenhouse gas emissions by the simple fact "that we've had an emissions trading scheme, and even a low carbon price has forced them to look at carbon pricing...and the reduction of emissions in their operations."

De Jong points out that it may also be impossible to link various carbon markets, as proposed by the likes of BP, Total and Shell, as it's already hard enough for the EU to harmonize carbon trading.

Most experts agree that ETSs in whatever shape or form can only be one piece of the puzzle of how to achieve greenhouse gas reductions. The targets vary from country to country, and it is hoped the Paris talks will lead to binding targets.

"The way to get there is both to put a price on carbon and to have an ETS in place, but also to support climate innovation and disincentivize technologies and behaviors that lead to high fossil emissions," de Jong told DW.

Dixson-Declève agrees that "strong regulatory measures" need to be in place to complement trading schemes. Putting a price on carbon involves many aspects, she says, like taxation, investment in new technologies, "reskilling" the workforce, regulatory measures and bringing the finance sector on board. Admittedly, she said, most companies still have a way to go on these issues.

While large parts of the globe agree that "a decarbonized world is now irreversible, irrefutable," as the UN's Figueres put it, US energy behemoths Exxon Mobil and Chevron remain skeptical, insisting they would not join any European company initiative. Proposals to set goals for curbing CO2 emissions were also rejected.

"We choose not to lose money on purpose," Exxon Mobil CEO Rex Tillerson recently said when asked about investing in renewable energies.

There is also great resistance to climate change measures in the Republican-dominated Congress, but Dixson-Declève says the successful ETS in California and the US government's climate targets showed that there is a willingness to change and that the likes of Exxon and Chevron are "starting to stand out like sore thumbs."

"There is this misconception that climate change and a low-carbon economy means that we have to tighten our belts, that we are talking about no growth, unemployment and poverty. That's not what we're talking about, we're excited about the fact that a low-carbon economy brings opportunities," she told DW.

As for the immediate future and the Paris talks, de Jong hopes that "it will set out some of the rules on how to monitor, report and account for emissions, so we can at last have a transparent way of calculating of how much more we need to do."

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