Carbon trading vs offsetting
What is the difference between carbon trading and offsetting, and what might offsetting mean for you?
Some businesses have a greater capacity to reduce their emissions of greenhouse gasses than others. This difference in ability means that those that can make significant emissions reductions have the opportunity to sell those savings to others. Farm businesses are not captured by a formal trading scheme but may want to be involved on a voluntary basis.
Compulsory trading schemes
Businesses may be part of a ‘cap and trade’ scheme. The total amount of greenhouse gases that may be emitted each year is determined at a governmental level according to agreed national targets.
This is the ‘cap’, and it reduces over time until a final annual emissions target is met, such as the UK’s net-zero by 2050.
For example, the EU Emissions Trading Scheme (EU ETS) operates in all EU countries, limits emissions from around 10,000 direct and associated activities in the power sector and manufacturing industry, as well as airlines operating between these countries.
Participation in these is compulsory, and the scheme covers around 40% of the EU's greenhouse gas emissions.
Other trading schemes
Similar schemes exist elsewhere, including in parts of the US, New Zealand and China, but they are not yet linked. The Paris Agreement, adopted by 197 countries, serves as an example of how international emissions markets could be linked in the future.
How emissions are measured and audited
In trading schemes such as this, businesses have their emissions measured, verified and audited:
- At the end of each compliance period, they must surrender carbon credits equivalent to their emissions in that period
- If they fail to surrender carbon credits, they typically face a fine, as well as mandatory purchase of credits equal to the shortfall
- Depending on the scheme, participants may be given some credits for free, or they may buy them in an official auction
- They can trade with other participants on the open market, buying or selling, as necessary
- Free allocations aim to prevent ‘carbon leakage’ where manufacturers move carbon-intensive industries overseas
A UK Emissions Trading Scheme (UK ETS) replaced the UK’s participation in the EU ETS on 1 January 2021. The UK ETS will apply to energy-intensive industries, the power generation sector and aviation.
Businesses not covered by schemes such as those described above may also wish to reduce the amount of greenhouse gasses they emit on a voluntary basis. They can do this themselves or by buying credits from others.
UK landowners are most likely to be familiar with this sort of carbon trading in the form of voluntary offsetting, either through the UK Woodland Carbon Code or the Peatland Code. With both of these schemes, verified emissions savings can be sold to other businesses seeking to offset their carbon footprint. Project details are held for public view by IHS Markit in the UK Land Carbon Registry. At the moment, carbon savings generated under these schemes would not be saleable into an emissions trading scheme.
What does this mean for levy payers?
The UK emissions trading scheme itself is unlikely to have any immediate impact on your business. However, the cost of compliance could eventually affect the prices of some of your inputs.
You or your landlord may be (or intend to be) involved directly in a voluntary offset scheme, but even if you aren’t, the need to measure and report your carbon footprint may still be there. You may find yourself in the supply chain of a retailer or other company selling food that will be reporting its climate impact. This will require all its suppliers to do the same.