How to double climate ambition with international carbon markets

The use of international carbon markets could lead the world to nearly double climate ambition relative to the national targets for mitigating emissions (NDCs) at the heart of the Paris Agreement by 2035. And this would not increase the total costs of emissions reduction, according to research co-authored by a member of the investment team for LOIM’s Global Carbon Opportunities Strategy.

Closing the ambition gap

A recent research paper – “Estimating the potential of international carbon markets to increase global climate ambition” – analyses the means by which the global emissions gap can be closed through international climate cooperation. The paper, published in World Development, is co-authored by LOIM’s chief carbon and environmental markets strategist Dr Ruben Lubowski. 

It proposes that carbon markets remain an underused tool in efforts to close the significant ambition gap between current emissions-reduction pledges and a pathway consistent with a 2°C temperature rise. Under every major Emissions Trading System (ETS) to date, the researchers note, emissions volumes have fallen faster and at a lower cost than expected. 

This is why high-integrity international carbon markets or other investments for international climate mitigation offer a potential mechanism to help close the global ambition gap. By levelling the marginal cost of abatement across trading regions, they increase the overall cost-effectiveness of global climate action.

The research shows that the inclusion of REDD+ (reducing emissions from deforestation and forest degradation in developing countries) merits special attention from policymakers as a means of closing the global ambition gap. This analysis is the first to explore the major role of avoiding tropical deforestation in contributing to cost savings as a means to enhance ambition.
 

The largest source of enhanced climate ambition

Using a dynamic global partial-equilibrium carbon market model, the researchers quantify cost savings under a range of scenarios for emissions trading within and across countries, as well as the corresponding potential to escalate reductions if those cost savings were translated into greater mitigation efforts.

The research shows that there is significant potential to enhance ambition even under scenarios where market participation is limited to regional trading blocs, or just to countries with the highest market readiness according to a ‘heat map’ developed by the researchers. Across all scenarios, the findings show significant cost savings associated with international carbon-market market cooperation, with global trading including REDD+ resulting in the largest potential cost savings. 

Global trading in emissions lowers the total costs of meeting these NDCs relative to the domestic policy base case by an estimated 62% when REDD+ are excluded from international cooperation. However, if the large mitigation potential from REDD+ is included in the global market, the costs of attaining the combined NDC trajectory fall to 105%. 

The inclusion of a broader set of nature-based climate solutions could further enhance the potential for cost savings. The study estimates that international transactions of 1-2 billion tons (Gt) of CO₂ equivalent per year would be necessary to cost-effectively implement the current NDC targets. 

If the cost savings from international cooperation could be recycled into greater climate ambition, the authors estimate that this would close about 60% of the ambition gap towards staying on trajectory consistent with limiting global warming to 2°C. The study also suggests that the efficiency offered by international markets becomes even more critical as global ambition increases, with roughly double the volume of transactions and 10-fold the value of trading potentially on the agenda if countries’ Paris Agreement pledges are scaled up. 


To read the research paper, click here.
 

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