As the world comes to terms with the realities of climate change, attention largely pivots towards greenhouse gas (GHG) emissions, often measured in tons of carbon dioxide equivalent (CO2e). This focus is not unwarranted as businesses, primarily those in energy intensive industries, emit a staggering amount of GHGs into the atmosphere. In this article I will discuss the environmental and economic costs of carbon emissions from the perspective of a business, highlighting global cap and trade programs, carbon taxes, and the burgeoning carbon credit market.

The Environmental Cost of Carbon Emissions

The harmful environmental ramification of excessive carbon emissions is undeniable. High GHG concentrations contribute to the warming of Earth's surface, with a consequent increase in extreme weather events, disruptions of ecosystems, acceleration of sea-level rise, and threats to biodiversity. Long-term emission trends show a clear link to catastrophic events such as forest fires and hurricanes growing in magnitude and frequency.

The Economic Cost of Carbon Emissions

Environmental degradation's economic costs are equally far-reaching, manifesting themselves in direct and indirect ways. Most conspicuously, businesses suffer physical damage from weather-related disasters due to global warming, impacting both their infrastructure and supply chains. The indirect costs are less tangible but include lower labour productivity, increased healthcare expenses, and strained public budgets.

In the United States, the National Bureau of Economic Research estimates that if current emission trends continue, the nation's GDP per capita will shrink up to 10.5% by 2100. Globally, the Organization for Economic Co-operation and Development (OECD) predicts an annual loss of up to 3.3% of global GDP by 2060 from environmental consequences.

Cap and Trade Programs

Amid the escalating environmental crisis, countries worldwide are exploring potential solutions to reduce emissions, with cap-and-trade programs emerging as a preferred approach. These schemes limit (or 'cap') GHG emissions by businesses, creating a tradable market for emission allowances.

In practice a regulatory body sets an emissions cap for the year and provides businesses operating in their jurisdiction an emissions allowance they must meet. These emissions allowances are provided in the form of carbon credits with each credit allowing a business to emit 1 ton of CO2e. Businesses that are able to operate at a deficit to their allowance can choose to sell or hold onto unused carbon credits. Businesses that are operating at a surplus to their allowance are required to purchase additional credits to cover their surplus for the year. Each year the regulatory body reduced the cap putting pressure on businesses to make emissions reductions year over year.

Europe’s Emission Trading System (ETS) is one of the largest and most well known cap and trade programs in the world. The scope of the ETS covers GHG emissions from energy production, energy intensive industry, aviation and maritime transport. Allowances are largely provided through auctioning however depending on industry free allocations are also provided. In 2019 member states, the UK and EEA countries generated total revenues of EUR 14 billion from auctioning carbon credits. The ambitions goal of the ETS to reduce emissions by at least 55% by 2030 compared to 1990 levels leads it to have one of the highest costs for carbon emissions globally. At the time of writing the cost of a 1 ton carbon credit in the ETS is EUR 85.

A distinct advantage of the cap-and-trade systems is that they allow market participants to innovate and reduce emissions at their pace, as long as they remain within the cap. The systems also provides an incentive for businesses to reduce emissions at a more rapid rate by allowing them to trade unused credits.

Carbon Taxes

An alternative to cap and trade is the carbon tax, which puts a direct price on carbon emissions. Critics argue that the cap-and-trade scheme's uncertainty in reducing emissions can be avoided by directly pricing carbon emissions, hence ensuring a more predictable path towards reduction. Sweden, Finland and Denmark are prominent European nations with active carbon taxing policies, with Canada leading the way in North America.

In Canada every province is required to have a set price for carbon emissions above the federal minimum price which is CAD $65 / metric ton of CO2e as of 2023. Under the Greenhouse Gas Pollution Pricing Act (GGPPA), the federal pricing system has two parts: a regulatory charge on fossil fuels like gasoline and natural gas, known as the fuel charge, and a performance-based system for industries, known as the Output-Based Pricing System.

Voluntary versus Regulated Carbon Markets

Parallel to these regulatory mechanisms, voluntary carbon offset markets are thriving. Businesses can choose to offset their carbon emissions by purchasing carbon offsets through voluntary markets. Technically, one carbon offset denotes the reduction or removal of one metric tonne of carbon dioxide equivalent from the atmosphere.

The voluntary market is mainly for corporations and individuals who voluntarily choose to offset their carbon footprint. Conversely, the regulated market comes under the cap-and-trade policy, auctioning carbon credits to companies that exceed their caps.

A business might purchase carbon offsets from the voluntary carbon offset market as a part of their sustainability efforts. Through the voluntary carbon offset market, a business can financially support projects that reduce carbon emissions like renewable energy initiatives, afforestation projects, or methane collection. This allows the business to balance out or 'offset' their own carbon footprint, contributing to an overall reduction in the total amount of greenhouse gases in the atmosphere. This can also enhance a company's corporate social responsibility and public image, showing care for the environment and its sustainability. The price of carbon in these voluntary markets is typically much cheaper when compared to the regulated markets and can vary from USD $0.75 to $10 per metric ton of CO2e.

If a business choses to participate in the voluntary carbon credit market it is critical to carefully vet the quality of carbon offsets purchased and to only support quality offset projects that can make a measurable reduction in emissions.

The regulated carbon markets' value stood at $44 billion in 2019, with the EU ETS representing approximately 70%. Meanwhile, the voluntary market operates globally, with a value of about $320 million in 2019, according to Ecosystem Marketplace.

Conclusion

Confronting the economic and environmental costs of carbon emissions is a colossal challenge for businesses globally. However, emerging mechanisms such as cap and trade, carbon taxing, along with voluntary and regulated carbon credit markets, equip businesses with increasingly effective ways to nudge the scales back towards environmental sustainability.

Moreover, as companies come to realize that the cost of climate inaction outweighs proactive emission cuts, the future promises an accelerated corporate commitment in mitigating carbon emissions. As businesses around the world join hands to counter the climate crisis, the power dynamics in these markets will inevitably shift, setting new precedents for environmental responsibility and stewardship.