Carbon-pricing schemes try to encourage lower emissions and capture their costs. COVID-19 temporarily slowed the increase but here we answer 10 questions of how the pandemic may affect allowances – permissions to emit – and offsets, the certificates of carbon credit awarded for preventing greenhouse gases reaching the atmosphere.

1) Will lockdowns reduce demand and prices for allowances and offsets?

For most carbon-pricing schemes, emissions allowances reflect the volume of emissions, so complying became technically easier as coronavirus closed workplaces. EU allowance prices dipped, then recovered as activity and sentiment resumed. Some schemes allow unused allowances to be banked for future use, but emissions will rise as business restarts.

2) Will the UN’s carbon-pricing mechanism be delayed?

The COP26 climate negotiations are postponed until November 2021: that could delay implementation of the global pricing mechanism that is part of the Paris Agreement.

3) How is the quality of carbon-reduction pledges assessed?

Whether the pledged reductions are absolute or relative; what they are relative to, and over what timeframe; and is the reduction in line with science – all affect quality. There should also be a strategy for achieving targets plus regular progress reports.

4) Which carbon-pricing method reduces emissions best?

Taxes can be implemented easily, trading utilises market forces, and offsets come with co-benefits – but many factors affect effectiveness, including how they are implemented.

5) Which sectors already use internal carbon pricing?

An internal price helps businesses understand their own emissions. About four-fifths of utilities and energy companies use internal carbon pricing but only half of materials firms and less than a third of other companies do.

6) Can all offsets be used in actual ETS schemes?

Some carbon-pricing schemes allow credits or offsets to be used in lieu of allowances – but usually with conditions, such as where, what or how much. The EU scheme requires that all credits come from Least Developed Countries.

7) What determines the credibility of an offset mechanism or project?

A project’s credibility covers its ‘additionality’ – whether it cuts emissions below the status quo – and ‘climate integrity’, whether it truly helps solve climate change. A robust verification and certification process is also important. Some certifying agencies are organisations such as the UN, others are independent bodies.

8) What determines an offset’s price?

Credits accepted for compliance are priced higher than those used just for voluntary purposes. But also important is supply and demand, itself influenced by a project’s credibility or quality – for example, purchasers value accurate emission accounting while some specialist projects have rarity value.

9) What issues relate to forestry offsets?

Despite trees absorbing and storing CO2, forests offsets are sometimes problematic. ‘Sequestration’ projects such as re-forestation, have permanence issues but also concerns in monitoring and verification of their additionality and leakage. Projects that avoid deforestation or convert forests into farmland have issues of leakage, as harvesting shifts elsewhere, and also in verifying that emissions really were avoided.

10) Has COVID-19 changed plans for airlines?

The Carbon Offsetting & Reduction Scheme for International Aviation programme would have offset excess emissions above the 2019/20 average. But with flights grounded, beleaguered airlines faced purchasing offsets above a significantly lower average. The baseline has been changed to 2019 alone – and with traffic volumes still low, the industry probably won’t be buying offsets for several years.

First published 14 July 2020.

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