To respond to climate change, many policy, financial and technological solutions have been proposed and implemented around the world. Carbon markets are an effective tool to reduce greenhouse gas emissions. So what exactly is a carbon market? Together GREEN IN Find out in the article below!
1. Carbon market concept
Carbon market is an economic mechanism to reduce greenhouse gas emissions through the trading of carbon credits. One tradable carbon credit is equivalent to one tonne of CO₂ or equivalent greenhouse gas.
This market, when put into operation, creates economic value for reducing emissions by incentivizing organizations, businesses and countries to reduce their emissions. If they do not reduce their emissions, they will have to buy quotas or carbon credits from other organizations/units that have successfully reduced their emissions.
2. History of carbon market development
The idea of a carbon market was conceived in the 1990s as countries became increasingly concerned about climate change. Until 1997, the Kyoto Protocol allowed countries with excess emissions rights to sell or buy them from countries that were emitting more or less than their committed targets.
In 2005, the European Union launched the ETS, creating the world's largest mandatory carbon market and becoming a model for other emissions trading systems.
Alongside mandatory markets such as the EU ETS, voluntary markets are starting to develop that aim to enable companies, organisations and individuals to voluntarily purchase carbon credits to offset their emissions.
Demand for carbon credits is growing rapidly as companies and countries commit to achieving net zero emissions by mid-century. Carbon markets are becoming an important tool in supporting these goals.
3. Carbon market classification
There are currently two parallel carbon markets operating: the mandatory carbon market and the voluntary carbon market:
- Mandatory carbon markets: It is a market where affiliated facilities are required to take measures to reduce greenhouse gas emissions so as not to exceed the quota threshold initially allocated to each facility by the regulatory authority. However, the usage level of facilities is always fluctuating, and to ensure that the quota is at the permitted level, facilities are allowed to exchange and trade quotas on the carbon market. This exchange does not change the total emissions of the market. Therefore, the mandatory carbon market was born with the main purpose of controlling emissions. The goods traded on the mandatory carbon market are emission quotas and a number of carbon credits approved by the competent authority that are allowed to be traded.
- Voluntary carbon market: This is a market where establishments voluntarily reduce greenhouse gas emissions, as well as proactively purchase carbon credits to achieve their goals. In the voluntary carbon market, the commodity traded on the market is carbon credits.
4. Review some benefits of carbon markets
It is undeniable that carbon markets bring benefits to countries, organizations and businesses in protecting the environment.
4.1. Promoting sustainable development
The first benefit is to create sustainable development when the carbon market creates a source of income for projects/activities related to reducing emissions. Countries, organizations and individuals can use this to develop projects on afforestation, forest protection or low or zero emission energy sources... as well as take advantage of revenue from selling carbon credits.
4.2. Be proactive in reducing emissions
The emergence of carbon markets enables businesses to be proactive in reducing greenhouse gas emissions. This brings high and long-term economic efficiency. Specifically, for businesses that are required to reduce emissions, they can initially choose low-cost greenhouse gas emission reduction measures. Later, if they do not have enough money for measures that require large budgets, they can replace it by buying carbon credits.
5. Developing carbon market in Vietnam
In order to pilot the carbon credit trading floor in 2025, the Government has issued Decree 06 / 2022 / ND-CP Regulations on greenhouse gas emission reduction and ozone layer protection. This Decree provides as follows:
“The period up to the end of 2027 will: Develop regulations on carbon credit management, greenhouse gas emission quota exchange activities and carbon credits; develop regulations on the operation of carbon credit trading floors; Pilot implementation of carbon credit exchange and offset mechanisms in potential fields and guidance on the implementation of domestic and international carbon credit exchange and offset mechanisms in accordance with the provisions of law and international treaties to which the Socialist Republic of Vietnam is a member; Establish and organize the pilot operation of carbon credit trading floors from 2025; Implement activities to enhance capacity and raise awareness about carbon market development.
From 2028 onwards, there will be: Official operation of carbon credit trading floor in 2028; Regulation of activities of connecting and exchanging domestic carbon credits with regional and world carbon markets.”
Conclusion
Carbon markets play a key role in reducing greenhouse gas emissions, helping the world move closer to the Net Zero target.