Political and economic responses
to the climate challenge
In order to restrict global climate warming to no more than 2°C by 2100 and limit its dangerous consequences, political leaders have put economic incentives in place to limit increases in greenhouse gas emissions.
The two major landmarks in building this political response are the 1992 Earth Summit in Rio and 1997 Kyoto Protocol.
Carbon finance refers to all financial movements of carbon assets, whether emission quotas under quota trading systems or carbon credits deriving from offset projects that reduce greenhouse gas emissions.
Putting a price
Because one tonne of carbon emitted into the atmosphere contributes to increasing the greenhouse effect and therefore tends to disrupt the climate, it has a negative impact on the economy and the whole of society. Economists therefore consider that there should be a cost associated with it, borne by the emitter.
So the aim of taxing CO2 emissions or capping emissions is to encourage economic operators to limit and indeed reduce their GHG emissions.
The economic toolbox for preserving our climate would not be complete without regulation (energy consumption standards for buildings or household appliances, low-energy bulbs, restricting vehicle emissions, etc.). This is vital in the medium and long term to direct behaviour and investment towards a low-carbon society and economy.
The 2 carbon markets
regulated & voluntary
The regulated market, otherwise known as the compliance market, encompasses all publicly regulated carbon asset trading, whether international (e.g. Kyoto Protocol), national (e.g. European quota trading system) or sub-national e.g. Californian quota trading system).
The voluntary market covers all other carbon asset transactions, especially voluntary offsetting credits.
There is nevertheless a bridge between the two markets: voluntary parties (businesses, local authorities or individuals) may acquire and use regulated carbon credits.
The converse is not possible.