How Important is the Carbon Trade Exchange?

Carbon Exchange

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In March 2020, United Nations Secretary-General Antonio Guterres delivered a sobering message to the world: “time is fast running out” for us to curb climate change

He was responding to a report by the UN’s World Meteorological Organization, which had found that wildfires in Australia and the Amazon, unprecedented heatwaves in Europe, and frightening levels of carbon dioxide in the atmosphere were just the beginning of disasters to come. 

The warnings shocked some, but they were not unexpected. For decades, scientists have been warning us about the dangers of climate change, and they have been offering solutions.

One of these solutions is instituting a global carbon exchange that would set limits on countries’ and businesses’ greenhouse gas emissions. The idea is still in its infancy, though some regions of the world, such as continental Europe, have been experimenting with it. 

In this article, our team at Aspiration will explore the impact that carbon trading will have on our future. We propose different ways that you can fight climate change with your money, including how you can do so with Aspiration’s Summit Account

What is carbon trading and how does it work?

Carbon trading works on the idea of turning carbon into a tradable commodity, such as gold and soybeans, with value in the global economy.

To trade carbon, a carbon market has to be first set up. If it’s an international market, each country will be given a limit of how many tons of carbon dioxide they can emit. This emissions quota is often referred to as a “cap-and-trade system”.

Countries that produce less than that limit can sell their remaining allowance as carbon credits to other countries. This earns them extra income and acts as an incentive for them to switch to clean, low-carbon technologies.

In contrast, countries that have gone over their emissions quota will need to buy carbon credits from other countries to offset their excess production. The need to buy carbon credits works like a mild penalty, designed to help countries realize the financial costs of their emissions and encourage them to cut down their emissions faster. 

In theory, the money earned from carbon credits would be used to fund clean energy projects that can quickly reduce our global greenhouse gas emissions. It would also be used to finance businesses working to mitigate climate change, such as reforestation and soil carbon sequestration organizations.

What is the main purpose of carbon trading? 

Carbon trading was developed to slow down the rate of global greenhouse gas emissions.

At the moment, several businesses and governments continue to release greenhouse gases into the atmosphere with impunity. Their pollution goes unchecked and the damage unseen, largely due to the fact that greenhouse gases are invisible to the naked eye. 

By setting a carbon limit for each industry and country, supporters of carbon trading hope to make business executives and world leaders accountable to the set quota. The limit or “cap” is enforced by an appointed authority, usually a multinational organization like the United Nations Framework Convention on Climate Change

The authority measures the damage that each greenhouse pollutant, methane, sulfur, carbon dioxide, does to the environment and human health. Each pollutant is then given an emissions limit and a value which are tracked and evaluated.

The carbon units are then traded in the carbon marketplace to incentivize low-carbon behavior. Businesses that stay below their allotted carbon limit because they use solar energy and drive electric vehicles can sell their surplus carbon units to other businesses that have used more than their allotted quota. 

How do you trade carbon?

To trade carbon as a business, you have to enter into a carbon market. 

Each market has a limited amount of carbon units that are traded to ensure that the units have value. How many units there are available depends on the emissions reduction target.

When you join the market, you need to obtain carbon credits to trade. Some large markets allocate credits to businesses for free while others put the credits up for auction. The credits you receive are proportionate to your industry’s carbon quota.

Businesses’ emissions are tracked by an authority throughout the fiscal year. This is to determine the number of greenhouse gases the businesses have emitted and whether they are under or over the reduction limit. 

At the end of the year, businesses have to surrender enough carbon credits to cover their emissions. 

Those that are under the limit will have excess carbon credits that they can keep for the next year. They may sell these credits to other companies or convert them into funds that they can use to invest in low-carbon projects. 

Those who are over the limit will have used up all of their credits. They will need to buy more from companies with excess carbon credits to offset their extra emissions. Some markets have penalties for businesses that cannot provide enough credits for their emissions.

Carbon markets are a relatively new concept and are only found in a few regions at the moment. The world’s first and largest carbon market is the European Union’s emissions trading system (ETS). Since 2005, this market has contributed to a 35% decline in greenhouse gas emissions from the power stations, industrial plants, and airlines participating in the market.

California also has its own cap-and-trade program, which it is using to reduce greenhouse gas emissions to 80% below its 1990 levels by 2050.

Do carbon offsets really work?

Carbon offsets are another carbon mitigation tool that’s sometimes used by businesses together with carbon credits. 

They tend to be more popular among businesses in places that do not yet have carbon trading markets. Businesses buy carbon offsets to balance out the greenhouse gases emitted through their operations and improve their ‘green credentials’.

But there has been recent criticism of the growth of carbon offsets. Many experts are concerned that buying carbon offsets might be used to cover up companies’ climate-destructive practices. Businesses may be buying carbon offsets as an easy climate “fix” instead of investing in real, long-term solutions like not using any energy derived from fossil fuels. 

Reforestation, for example, is one of the most popular carbon offset initiatives; it’s easy to measure, highly visible, and has added socio-economic benefits for communities living near the tree planting projects.

But researchers discovered that some reforestation carbon offset projects were plagued with corruption. After the trees were sold off as carbon offsets, they were cut down and bought by logging companies. 

Supporters of carbon offsets say that they are useful only after companies have committed to other low-carbon initiatives, such as changing to delivery trucks that are all electric-powered. They also say that there are no other carbon mitigation tools yet, besides carbon offsets, that make carbon removal from the atmosphere popular, easy to understand, and accessible.  

For now, it’s best to buy carbon offsets that have been verified by an authorized third-party such as Verra or The Gold Standard.

Other ways to financially fight climate change

If you’re in an area that doesn’t yet have a carbon market, and you’ve bought carbon offsets already or want alternatives, here are some other ways to use your money to fight climate change. 

Invest in sustainable businesses and clean energy tech

Transitioning to a low-carbon future doesn’t just require us to reduce our greenhouse gas emissions, it also requires us to build low-carbon infrastructure that can keep our planet sustainable. 

According to some estimates, building the clean energy infrastructure for this transition could cost up to $4.5 trillion for the United States alone. You could use your money to invest in clean energy companies and sustainable businesses to help accelerate the transition. 

Investing is simple. You can invest in a sustainability-focused mutual fund, such as Aspiration’s Redwood Fund, that includes progressive sustainable businesses only. None of the companies in the fund have ties to fossil fuels, ensuring their cleanliness.

Donate to the climate movement 

You could also donate to the climate movement. In recent years, the climate movement has become a powerful force that’s countering the power of the fossil fuel industry and bringing conversations about climate change to the world stage. 

By helping the climate movement grow, you’re actively challenging the status quo of businesses operating without social responsibility. Here are some organizations that are fighting climate change, from rainforest conservation nonprofits to clean air advocacy groups.

Contribute to a voluntary tax fund

If you live in a state like California that allows you to make voluntary tax contributions to a climate change fund, you should consider it.

Programs like the Climate Innovation Grant Program receive your tax contributions and use the funds to develop and research new climate technologies, which can help reduce greenhouse gas emissions.

Reduce your purchases

You could also do a complete 360 with your money and not buy anything. 

Buying less helps prevent waste that usually ends up in landfills and our oceans. When consumers decrease the demand for new products, businesses lose the incentive to keep producing non-stop. Fewer products being produced means less need for fossil fuel heavy logistics such as trucks and airplanes.

Climate change and banking 

Our climate change crisis is being fuelled by money. 

Between 2016 and 2020, large multinational banks loaned nearly $2.7 trillion to the fossil fuel industry, effectively increasing our greenhouse gas emissions beyond an acceptable limit. Another $1 billion was poured into the palm oil business, which has caused mass deforestation on an unprecedented scale. 

Banks have the power to keep these industries operating because they own vast pools of capital. But investments in fossil fuels are not sustainable for us and the planet. We need this money to be diverted toward low-carbon projects and sustainable businesses. 

That’s what green neobanks like Aspiration are doing. We’re bringing on the finance revolution by making money work for the planet. We help our customers purchase carbon offsets automatically each time they buy gas and groceries. 

And we make investing in sustainable businesses easy using our very own Redwood mutual fund, which anyone can start investing in with just $10. 

Our B Corp certified bank makes sure that none of your money goes to fossil fuels. Join us today to fight for the planet.

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