Carbon reduction strategies will be a key focus for many businesses this year.
A healthy and sustainable climate is a common good that requires everyone to do their part.
In most cases, the emitting company does not pay in full for the damage it causes, like air pollution, or the physical impact of climate change.
That’s a solution corporate leaders and policymakers are increasingly relying on in their race to a net-zero economy, as it provides them with a tool to reduce emissions in a cost-effective way, as seen in Europe and China.
Governments around the world are starting to price carbon by imposing mandatory carbon markets on energy-intensive sectors, notably the power sector and manufacturing such as steel, cement, plastic and petrochemical industries.
The yearly emissions cap is decreased over time in line with the targeted level for emissions in the future.
More costly technologies are employed when the reduction targets cannot be met with the cheapest options.
If it follows up with action, carbon pricing will also become relevant for corporate decision-makers in sectors like shipping, road transportation and real estate.
However, just under 4% of these emissions are priced within the €35-70 range per ton of CO2 that is currently needed to meet the 2˚C temperature goal of the Paris Agreement.
And the carbon price is usually too low to bring emissions in line with the climate goals.
Jurisdictions across the globe have their own carbon pricing mechanisms that result in different carbon price levels.
Different prices levels create incentives for corporate decision-makers to relocate carbon-intensive activities towards regions with no or low carbon prices.
It also provides governments in producing countries with an incentive to increase carbon prices, as the CBAM would allow them to reap the tax benefits of the carbon policies themselves rather than allowing other countries to benefit from import taxes.
Still, with increasing pledges to net-zero strategies, a growing number of companies are looking for ways to reduce or offset their emissions, whether or not they are already subject to mandatory schemes.
Voluntary carbon markets are initiatives that facilitate trade in emission units, called carbon credits, generated from emission reduction activities.
Hence, VCMs provide a way to offset emissions in regions with the lowest abatement costs and direct green investment from richer to poorer regions.
Corporate decision-makers need to take this into account as not all carbon credits are considered effective and credible emission reduction strategies by shareholders, like NGOs, or employees.
In the past, under the Kyoto protocol, there was a link between mandatory and voluntary carbon markets.
After years of negotiations, in the autumn of 2021, COP26 agreed on a rulebook to eliminate most of these issues, referred to as Article 6 of the treaty.
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