How carbon markets are driving deeper, faster pollution cuts in Paris climate pledges

Among the 170+ countries that have submitted their carbon-cutting plans — known as Intended Nationally Determined Contributions, or “INDCs” — more than half have either stated their intention to use international carbon markets to tackle carbon pollution, or are already employing them domestically. Image source: cropped INDC map from IETA's INDC Tracker

With only a few days before nations meet in Paris to negotiate an inclusive post-2020 structure for global climate cooperation under the UN Framework Convention on Climate Change (UNFCCC), we already know that the world will be entering a new paradigm of climate action, in which all nations play a role in the collective fight against climate change.

We also know that while the emissions reductions pledged for 2025 or 2030 by over 170 countries over the course of this year are significant, aggressive additional action well beyond 2030 will be necessary to meet the internationally agreed goal of limiting global average atmospheric warming to no more than 2 degrees Celsius, or 3.6 degrees Fahrenheit. That goal is the upper limit agreed by the international community, at a level that scientists believe would likely avoid the worst impacts of climate change.

Because the Paris pledges mark only the beginning of a new era of climate cooperation, it is imperative that an effective international climate agreement promotes greater and greater ambition as it matures. A successful Paris agreement can thus set the stage for the world to turn the corner on global emissions.

Even before they arrive in Paris, countries have started identifying effective tools that can be used to accelerate ambition over time, so that the UNFCCC’s objective – to “prevent dangerous anthropogenic interference with the climate system” – can be met.

Emissions trading systems allow countries to be more ambitious, by channeling capital and entrepreneurial effort into finding the fastest and cheapest ways to cut emissions.

Many countries have stated they can and will do more, if they have access to bilateral, regional, or international carbon markets – also known as emissions trading or “cap-and-trade.”

As shown in the map above, among the more than 170 countries that have submitted their carbon-cutting plans (known as Intended Nationally Determined Contributions, or “INDCs”) to the UNFCCC, more than half have either stated their intention to use international carbon markets to tackle carbon pollution, or are already employing them domestically, at the national or subnational level. (For more detail, see the UNFCCC's synthesis report on the aggregate effect of the intended nationally determined contributions [PDF] and IETA's INDC tracker.)

Mexico is a great example of how markets can drive greater ambition and deeper reductions. Mexico’s INDC indicates carbon markets can play an important role in reducing Mexico’s carbon pollution well below its current planned cuts of 22% below “business as usual” (BAU) levels by 2030.

In fact, Mexico states that international carbon markets are “require[d]” to meet its conditional emissions target, i.e. a 36% reduction below BAU of greenhouse gas emissions by 2030.

Think about what that difference means: Mexico says that the availability of international carbon markets would allow it to cut its emissions 60% more than its unconditional goal.

If all nations – or even just major economies with the capacity to administer robust emissions trading systems – increased their ambition by 60%, we would collectively be much closer to limiting warming to no more than 2 degrees Celsius.

Countries agree that carbon markets catalyze “an increase in mitigation ambition, particularly by developed countries.” Indeed, the advantages of a collaborative model for cost-effective emissions reductions informed the design of the Kyoto Protocol’s emissions trading system, which is credited with spurring developed countries to adopt deeper emissions reductions than they would have in the absence of these carbon market tools.

How emissions trading works to reduce pollution

Just how do emissions trading systems allow countries to be more ambitious?

By channeling capital and entrepreneurial effort into finding the fastest and cheapest ways to cut emissions, a price on carbon drives deeper reductions.

While cap-and-trade is not the only way of pricing carbon, it is a natural candidate, combining the economic appeal of a carbon price with the environmental guarantee of an emission cap.

Evidence from actual emissions trading markets – including the EU Emissions Trading System, the California cap-and-trade program, the U.S. Regional GHG Initiative (RGGI), and the U.S. sulfur dioxide trading system – shows that these programs are cutting pollution at lower cost and in less time than initially expected.

Growing experience with emissions trading – and the cross-border sharing of lessons learned that allows development of more effective domestic policies over time – means that momentum is building on carbon markets around the world, at the international, national, and subnational level.

As the vast majority of countries head to Paris with concrete plans to reduce their pollution, coordination among jurisdictions with carbon markets will be increasingly crucial to maximize cost-effectiveness and environmental integrity – which in turn will give jurisdictions the confidence to catalyze a faster transition to a prosperous low-carbon economy.

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