Carbon emissions are one of the biggest polluters in the world, and the U.S. ranks second among nations with the highest carbon dioxide (CO₂) emissions. With this in mind, the country is taking significant strides to reduce its contribution to greenhouse emissions to promote a greener and more sustainable economy.
One solution gaining traction is the carbon market, a financial incentive for businesses and individuals to help them reduce their carbon footprint. While carbon markets pave the way for green growth, it’s also an effort to boost innovation and stimulate job creation in the renewable energy sector.
Let’s explore the United States carbon market and its potential to boost eco-friendly growth.
Understanding Carbon Markets
A carbon market, also known as an emission trading scheme, is a mechanism that facilitates the buying and selling of carbon credits to reduce greenhouse gas emissions. Carbon credits come from investing in renewable sources like solar, reforestation, direct air capture, and implementing energy efficiency measures. As the purchaser, you’re allocated carbon credits, giving you a right to emit carbon dioxide depending on the credits you’ve purchased.
In the carbon market, CO₂ emission is a commodity, allowing the trade to operate on the principle of supply and demand. In 2023, the global carbon market size was valued at USD 948.7 billion.
A company that reduces its emissions can sell the excess credits to other companies, creating a financial reward for those who can reduce their carbon footprint. One carbon credit represents a ton of carbon dioxide or its equivalent. The credits are issued by regulatory bodies or international organizations.
Overview of the United States Carbon Market
The United States aims to achieve net-zero emissions by 2050 and is taking big strides to achieve this target. According to Morgan Stanley, coal is likely to disappear from the US grid by 2033 to achieve carbon-free electricity by 2033. Experts also appreciate the impact of solar energy. It’s projected that by 2050, US solar panels will be 33% more efficient in reducing the carbon footprint.
The United States carbon market works through two main channels:
- Government-regulated compulsory markets
- Private company voluntary markets
The U.S. Environmental Protection Agency (EPA) has the mandate to regulate greenhouse gas emissions and emission trading programs. EPA emission programs give emission sources a limit on the carbon they are allowed to emit in the air. The limits encourage companies to keep emissions under their caps/budget.
Households are also not left behind; they can lower their carbon footprint through simple actions like installing newer versions of air conditioner (ACs) with a higher Seasonal Energy Efficiency Rating (SEER). They can also tap into renewable energy like solar, driving EVs instead of gas vehicles, and upgrade to electrically efficient appliances, etc.
What Research Shows: State by State
Market researchers project its value could be worth more than USD 30 billion by 2034. Thirteen states with over 30% of the United States population and 36% GDP (gross domestic product) run active carbon pricing programs.
California leads with its multi-sector cap-and-trade program. The Regional Greenhouse Gas Initiative (RGGI), made up of eleven Northeastern states, is the first mandatory program that limits power sector emissions.
Washington has its cap-and-invest program, and Oregon has a carbon pricing program. Some states are establishing their programs, meaning the carbon market gets stricter over time.
The agriculture sector is not left behind while looking for a solution to climate change and boosting the United States carbon market. The Department of Agriculture (USDA) is looking for ways to minimize the high cost of measuring, verifying, and reporting greenhouse gases. These costs limit the participation of the sector in the carbon market.
With a solution, the agriculture sector can play a significant role in the carbon market. Farmers’ participation in the credit market helps save the planet, and they can also earn an income while helping companies meet their cap.
Key Players in the U.S. Carbon Market
Since the United States carbon market is fast-evolving, it has many key players involved to ensure its future success. These include:
- Regulatory bodies and compliance programs like the California Air Resources Board (CARB), RGGI, and EPA.
- Standard-setting organizations such as Verra (Verified Carbon Standard), Gold Standard, American Carbon Registry (ACR), and Climate Action Reserve (CAR).
- Carbon market intermediaries: These are carbon brokers such as EcoAct, Carbon Credit Capital, and ClimateCare.
- Trading and exchange platforms, such as Xpansiv CBL, StoneX, and Chicago Mercantile Exchange (CME).
- Corporate buyers, like Microsoft, Shell, Amazon, and Google.
Challenges and Opportunities in Implementing a Carbon Market
The lack of standard practices, especially in the voluntary credit market, creates challenges for those buying and selling. This calls for necessary infrastructure and a regulatory framework to ensure transparent and efficient trading platforms and accurate, enforceable emission caps.
Furthermore, ensuring robust monitoring, reporting, and verification systems can increase the success of carbon markets towards green growth.
Small and medium-sized enterprises are struggling to participate due to limited resources and a lack of expertise. Providing technical assistance and capacity-building programs can encourage them to participate.
Another challenge is ensuring carbon credits represent real and lasting emissions. Carbon credits have been investigated in the past due to questions on credibility. The Voluntary Carbon Markets Joint Policy Statement and Principles highlight the importance of credit and market-level integrity, which might encourage participation.
High costs are a barrier to participation during the monitoring, verification, and reporting process, especially for farmers. In addition, the market has seen wild swings in carbon credit prices as its value has reduced significantly in recent years.
Despite these challenges, some economic and environmental positives are coming from carbon emission trading:
- The voluntary carbon market might grow from $2 billion in 2020to roughly $250 billion by 2050.
- The government is taking a hands-on role in shaping voluntary markets.
- Companies and individuals genuinely want to cut their emissions.
- The carbon market stimulates innovation and the development of new technologies towards a more sustainable future.
- Emission reduction projects are funded directly by carbon markets.
- Carbon markets create green jobs, boost clean energy projects, and improve environmental protection.
- Carbon markets lead to healthy ecosystems and improved air quality.
- Rapid growth in natural climate solutions.
Takeaway
While many efforts are in place to reduce carbon footprints, the United States carbon market works as an effective tool for mitigating emissions through greenhouse emissions trading. This helps achieve climate targets cost-effectively.
Market mechanisms can reduce climate target costs by 30-40% by 2030. The figures can rise only if rules are clearly defined and followed. The government and regulatory bodies need to be strict about the laws and regulations of carbon markets to reach net-zero emissions by 2050.
