THE ENVIRONMENTAL MARKETS
The emergence of exchanges like GIX is part of a broader context related to environmental markets. Environmental commodities are tradable goods that represent a specific environmental benefit, such as carbon credits or renewable energy certificates (RECs). These commodities are fundamental tools for companies seeking to achieve sustainability goals, reduce carbon footprints, or comply with environmental regulations; they also create financial incentives for sustainability. The future of environmental commodity markets is viewed as growing, with the expansion of carbon markets, an increase in corporate sustainability initiatives, and the integration of technology (such as blockchain) to improve transparency and traceability. But what exactly are we talking about?
NATURAL COMMODITIES: WHAT ARE THEY?
Unlike traditional commodities (such as oil or wheat) that have intrinsic physical value and are raw materials, environmental commodities represent the value of positive environmental actions or benefits. Their value derives from the ability to offset negative externalities, such as greenhouse gas emissions. In economics, externalities are effects of an economic activity that impact the well-being of parties not directly involved in the transaction, without these parties being compensated for the costs or benefits that arise. These can be positive or negative and pertain to both production and consumption .
CARBON MARKETS Carbon markets are a tool to tackle climate change by trading emissions or emission reductions. There are two main types: cap and trade schemes (or emission trading systems, ETS) and baseline-and-credit mechanisms, also known as offsetting mechanisms.
• In ETS, companies trade future pollution permits. The government has control over the total amount of emissions for the group of participants. • In offsetting mechanisms, units of emission reductions (‘offsets’) are traded, representing one ton of already reduced CO2 equivalent. The idea is that companies pay others to reduce emissions instead of doing it themselves. Offsetting can lead to a ‘zero-sum game’, where one ton is emitted and one is reduced elsewhere. Global carbon markets so far have been almost exclusively offsetting mechanisms.
Well-known examples include the Kyoto Protocol markets, such as the Clean Development Mechanism (CDM), International Emissions Trading (IET), and Joint Implementation (JI).
These markets have faced some critical issues, such as the availability of too many credits and the risk of “hot air”. What is it about? The “hot air” problem in carbon credits refers to the risk that carbon credits are used to offset emissions without yielding a real environmental benefit. This occurs, for example, when a country, having exceeded its emission reduction target, sells carbon credits to other countries, without this leading to further actual reductions. One of the main challenges in carbon markets post-2020 is to avoid double counting. This happens when a reduction in emissions is counted both by the country or entity that achieved it and by the entity that purchases the credit. To prevent this, it is essential that countries apply “corresponding adjustments” to their reported emissions when selling credits.
There is also a voluntary carbon market, where private companies purchase credits on a voluntary basis for corporate social responsibility or public image improvement purposes. This market also has critical issues, including the risk of double counting with the national targets of host countries and the ‘non-additionality’ of projects. ‘Non-additionality’ refers to carbon offset projects that do not provide a real additional environmental benefit beyond what would have been achieved anyway without the project. In other words, they are not truly ‘additional’ because the emission reduction activities would have been carried out in any case, regardless of the offset project.