Can Carbon Markets Like Egypt’s Help the Environment?

Smoke coming out of factory. Free public domain CC0 photo.

Climate change is widely considered the biggest existential threat facing humanity today. Experts worldwide are warning that the failure to take swift action will result in catastrophic outcomes for the planet, its population, and the global economy.

Egypt has been working towards increasing its environmental action and commitment to combating climate change. One option, which it has already started pursuing, is carbon trading.

There exist a variety of approaches that scientists and policymakers believe can be made to help stave off the impact of climate change, mostly revolving around emissions reduction. From  halting and reversing deforestation, and transitioning to greener energy, to carbon capture, most approaches revolve around reducing harmful emissions. Carbon trading plays on the idea of carbon capture by creating markets aimed to encourage the approach, as well as encouraging companies to reduce their emissions. Carbon trading is based on trading carbon credits and buying carbon offsets.

What are they and to what extent do they help the environment?

What are Carbon Credits and Carbon Offsets?

Carbon credits and offsets are two similar concepts, and oftentimes used interchangeably—though there is a technical difference between them.

Some governments place a cap on how much companies can pollute. However, some companies produce less pollution than what this cap permits. This ‘surplus pollution’ can be traded in a carbon market as a carbon credit.

The market that trades in carbon credits is regulated as part of a ‘cap and trade’ system, where a limit is set and emissions can be bought, from a seller that is below their limit, for the buyer to go over their limit.

Carbon offsets, on the other hand, are voluntary removals of emissions from the atmosphere, carried out by specialized carbon capture companies. This is usually done through carbon sequestration, which is “capturing and storing atmospheric carbon dioxide,” according to the United States Geological Survey (USGS).

There are two main types of carbon sequestration, geological and biological.

According to the USGS, “geologic carbon sequestration is the process of storing carbon dioxide (CO2) in underground geologic formations.” In other words, carbon dioxide is stored in the earth. On the other hand, “biologic carbon sequestration refers to storage of atmospheric carbon in vegetation, soils, woody products, and aquatic environments,” explains USGS. Through this approach, carbon dioxide is stored in nature. In addition, a new method, technological carbon sequestration—using carbon as an energy source—is emerging.

Individuals, companies, or other entities may purchase carbon offsets from a voluntary market to, as the name suggests, offset their emissions. Consumers of these instruments are basically paying those who carry out carbon sequestration.

Each carbon credit or offset equals one tonne of carbon emissions.

Egypt set up the first voluntary carbon market in Africa in November 2022. The Egyptian stock exchange attracted 11,000 new investors as a result. Examining the potential benefits and drawbacks of carbon trading will help illuminate the opportunities and challenges facing the implementation of this initiative in Egypt.

Benefits of Trading Carbon Credits and Offsets

The International Carbon Action Partnership (ICAP) presents several of the benefits of carbon markets. To begin, ICAP explains that emissions trading “sets a clear price on carbon.”

The cost of emissions to society is integrated into the price, the partnership says. This means that pollution has a monetary value that must be paid, which will discourage polluters from emitting more than they deem necessary to their operations.

Furthermore, an emissions trading system (ETS) “puts a firm limit on emissions.”

“This ensures that the desired environmental outcome will be reached. With a steadily declining cap, an ETS also delivers a predictable reduction pathway, which sends a long-term signal for businesses and investors,” ICAP says.

In addition to this, ICAP explains that ETSs can work in different political and economic contexts; emissions are traded in different national and supranational levels, from cities to provinces to states, and even a supranational entity like the European Union (EU).

Criticism of Trading Carbon Credits and Offsets

However, emissions trading is not untouched by criticism. In a paper entitled “The Hidden Disequities of Carbon Trading: Carbon Emissions, Air Toxics, and Environmental Justice,” Raul Lejano, a professor of environmental education at New York University, and his co-authors, contend that carbon trading is socially unjust.

The authors warn against “the potential creation of sacrifice zones” where “carbon emissions may accumulate in one area as a big local emitter continues emitting carbon by buying credits from sources in other areas.”

They give the example of oil refineries disproportionately present in underprivileged communities.

“The problem is that emitting carbon sometimes means emitting other air contaminants—what other scholars refer to as co-pollutants,” leading to “unrecognized externalities to carbon trading.” This means that there are harmful effects to emissions trading that are not taken into account in pricing—specifically these air contaminants, such as benzene, dioxion, and ammonia.

“There is at least the potential for such schemes to maintain or exacerbate already existing exposures of lower-income, minority communities to landscapes of environmental injustice.”

This is not the only critique of carbon trading. Global Witness, an advocacy group, criticizes carbon markets for enabling greenwashing as companies participating in the market claim that they are environmentally friendly.

The voluntary carbon market “gives cover for companies to continue polluting as usual. Rather than aiding the vital reduction of greenhouse gas emissions, it creates a system in which companies delay meaningful action on the false basis of having ‘cancelled out’ their emissions with the credits they purchase,” Global Witness says.

“Similarly, companies use these purchases to label themselves as environmentally friendly without solid basis or certification. These vague and loosely applied labels include ‘carbon neutral’, ‘science-based’, and ‘Paris-aligned’ [referring to the 2015 Paris Climate Accords], which are often impossible to verify,” it adds.

More importantly, Global Witness explains that there is a difference between biological carbon and fossil fuel carbon. While the former has a faster cycle and is not permanent, fossil fuel carbons have a slower cycle and therefore last longer. Yet they are treated in the same manner. Offsetting biological carbon in favor of continuing to use fossil fuels would be detrimental.

Furthermore, there are issues with actually measuring the carbon reduction.

“It is a blow to anyone committed to the idea that emissions trading can help the world to reach net zero, to learn that 90 percent of the rainforest credits analyzed are unlikely to represent genuine carbon reductions,” writes the Guardian in an editorial. Its investigative journalists looked into Verra, the most popular entity which certifies the credits that companies use to claim that they helped the environment.

“Shell is planning a massive expansion of its offsetting operations. And there is no question that an emissions trading system in which big oil is the largest customer has gone horribly wrong. If carbon credits are to be more than a dangerous distraction from the task of ending our dependence on fossil fuels, they must not be treated as licenses to pollute.”

Carbon trading should be treated as a last resort, the Guardian says.

Overall, there are undeniable advantages to carbon trading, but many activists and experts caution that it must come as part of a larger strategy of consciously eliminating harmful emissions, and not solely relying on a market mechanism to do the job.