Any market in this world works on the concept of demand and supply. Similarly, a carbon market works on demand and supply of carbon credits.
Carbon credit – A carbon credit is a tradable permit or certificate that provides the holder of the credit the right to emit one ton of carbon dioxide or an equivalent of another greenhouse gas.
Under the Kyoto Protocol, a set of rich and industrialized countries were given specific emission reduction targets. One of the indirect ways to achieve these was to let countries buy carbon credits from developing countries.
The developing countries, on the other hand, had no obligations under the Kyoto Protocol to reduce their emissions, but if they were able to do so, they could earn carbon credits. Developed countries could buy these credits and count them towards achieving their targets. Developing countries did not lose anything, and instead received payment to finance their switch to cleaner technologies.
Increase in demand for carbon credits: Over the years, developing countries like China, India, and Brazil accumulated large numbers of carbon credits, which at one point, were in great demand as developed countries had to achieve their targets, and this was often a cheaper way than to reduce emissions by upgrading their own industrial facilities.
Decrease in demand for carbon credits: The rich industrialised countries found Kyoto protocol constraining. So, as the noise grew for a new agreement to replace it, the motivation of the developed countries to move towards their targets reduced. Countries realized that non-achievement of their targets did not carry any penalty. So, most never met their targets. Several others even walked out of the Kyoto Protocol. The result was a big drop in demand for carbon credits, and a consequent fall in the price of carbon.
Developing countries continued to earn carbon credits: Countries such as India, China and Brazil continued to earn carbon credits in the hope that demand would return, once a successor pact to the Kyoto Protocol was in place. That happened with the Paris Agreement.
Carbon markets are there in the Paris Agreement as well, but a new problem arose.
Developed countries said they would not allow the transition of the earlier carbon credits to the new market mechanism, claiming many of these did not accurately represent emission reductions. They sought more robust methods to grant carbon credits. The developing countries are insisting that their accumulated carbon credits, worth billions, remain valid in the new market.
This remains the last stumbling block in the finalisation of the rules and procedures of Paris Agreement. Most other issues were negotiated at the previous meeting in Madrid in 2019.
Settling this is one of the main objectives of the Glasgow meeting.