Six ways technology perfects carbon trading

Carbon trading aims to reduce greenhouse gas emissions, particularly carbon dioxide (CO₂), one of the major contributors to global climate change. Environmental imbalances, such as rising sea levels, more frequent and severe weather events, and increased quantities of CO₂ and other greenhouse gases in the atmosphere, are all serious effects of global warming.

Carbon trading is the process of buying, selling or exchanging credits that allow the holder to emit CO₂ or any other greenhouse gas.

The Kyoto Protocol, an international agreement (1997) linked to the United Nations Framework Convention on Climate Change (UNFCCC), sets internationally binding emission-reduction targets aiming to control carbon emissions and mitigate global warming.

In December 2015, during the 21st Conference of the Parties (COP21) to the UNFCCC, 196 countries adopted the Paris Agreement, an international treaty on climate change. The main objective was limiting global warming to less than 2 degrees Celsius above pre-industrial levels, ideally under 1.5 degrees.

The Paris Agreement mandates that each country establishes its own nationally determined contributions (NDCs) for reducing emissions, to be reviewed and updated every 5 years. Additionally, it includes provisions for transparency and accountability, such as regular reporting and progress review toward meeting the NDCs. As of March 2023, 195 countries have ratified the agreement.

The “Cap and Trade” model is used in carbon trading. An emissions limit (cap) set for a specific period aims to reduce carbon emissions over time. The idea is to provide a financial incentive to cut greenhouse gas emissions. Parties that produce fewer gases sell unused credits to those that need them to comply with the cap.

Carbon credits are the main carbon trading initiative. However, there are other products like:

• Renewable energy certificates: These carbon credits focus on renewable energy projects such as wind or solar.
• Carbon offsets: These carbon credits represent the removal or reduction of a metric ton of greenhouse gas emission from the atmosphere. They are produced by companies that have reduced or avoided emissions.
• Carbon futures: These exchange-traded futures work like any other futures, allowing buyers and sellers to agree to the price of carbon credits at a future date. They can be settled in cash or by physical delivery of carbon credits.
• Carbon swaps: Two parties exchange carbon credits or allowances.

Carbon markets give a price to greenhouse gases and CO₂ emissions, transforming them into tradable commodities. This can be either carbon credits or offsets. Two markets trade them:

• Compliance market: Mandatory markets issue a set number of carbon credits per company annually. They’re non-voluntary, and each company must fulfill them. The United Nations’ clean development mechanism (CDM) is one of the most active compliance carbon offset programs.
• Voluntary market: These markets are not mandatory but self-governed. Organizations or individuals with operations that generate carbon offsets can issue and sell to those looking to decrease CO₂ emissions. The voluntary market is smaller and less transparent.

The two markets complement each other, making it easier for farmers, ranchers and landowners to find buyers for their carbon offsets.

Here are the four flexible methods (Kyoto Protocol) that monetize excess permits or reduction credits and establish the carbon market:

1. CDM: A nation or business can carry out an emission reduction project in developing countries, generating marketable certified emission reduction (CER) credits. Credits are only issued after independent verification of the project's emission savings. The goal is to encourage sustainable development and increase opportunities to reduce emissions.
2. Joint implementation: A company or country with binding emission reduction targets can earn emission reduction units (ERU) from an emission reduction project in another country as an alternative to achieving them domestically. The host country benefits from foreign investment and technology transfer, helping the investor to meet its emission reduction obligations, often at a lower cost.
3. Emission trading system (ETS): The market sets permit prices based on supply and demand. Permit cost is expected to rise as availability decreases, giving regulated organizations a financial incentive to cut emissions.
4. Removal units (RMU):T This type of carbon credit  represents removing greenhouse gases from the atmosphere. Projects supporting actions like reforestation and afforestation, which increase the carbon stored in forests and other vegetation, produce RMUs.

IT plays an essential role in the practical and transparent management of carbon credits and emissions data, which is critical for the successful functioning of the carbon market and the global mitigation of climate change.