I am Igbo, from a tribe in Eastern Nigeria famous for trading. There is a theory that an Igbo trader can make you buy anything, and a joke told to support that. One day, a man who had no problems with his legs returned from the market with a wheelchair. His surprised neighbor saw him carrying a wheelchair, and asked him why he bought it. The man responded that an Igbo trader convinced him to buy the wheelchair because there was a discount. “Buy it now my brother”, he said, “it may be too expensive when you need it”.

In a way, that joke represents the 21st century paradigms in trading, where we now trade likes, followers, and shares of crypto art more valuable than entire countries’ GDP.

Moving away from digital disruption to the disruption that the energy transition has brought, one product that divides opinion and rightly so, is Carbon trading. But before discussing carbon trading, let’s start with the problem that birthed it – climate change or global warming. In simple terms, an overwhelming majority of leading scientists (and governments) agree that the greenhouse gases (carbon dioxide, methane, nitrous oxide, ozone, etc) generated by man’s activities (such as energy generation from oil, gas, and coal) is creating a ‘blanket’ in the atmosphere that is increasing the earth’s average temperature at a never before seen rate. This temperature has risen 1.2oC in the last 150 years, and if the rise reaches 1.5oC (or 2oC others say), it will lead to irreversible instability in the global climate that will damage the planet, and make life on earth very, very difficult. If the current rate of temperature rise is maintained, we will get to 1.5oC in 20 years or less.

As part of climate change mitigation, carbon trading mechanisms were introduced which created a means to buy and sell carbon credits (which I call the ‘right to emit GHGs’). Thus, creating a system that should encourage projects which emit less than what is reasonably expected (by allowing then sell these reductions as rights to emit GHGs) and discourage countries or companies from over-emitting by forcing them to buy these rights before emitting beyond what is reasonably expected.

But, while simple and brilliant on paper, it is contentiously complex in practice, and fraught with criticisms. For example, how do you reasonably and fairly assess the projects in different countries which will deliver a reduction in emissions that would otherwise not have happened without funds from carbon trading? Some projects that sold carbon credits were coal power plants with more efficient technology or coal sources, therefore, ‘reducing emissions’. But the criticism – does that project need any financial support, since using more efficient technology means better lifecycle value, and should already be the default with technology advancement? Another example is using a Combined Cycle Gas Turbine (CCGT) to generate electricity. Yes, it has lower emissions intensity, but shouldn’t CCGTs be the standard for gas thermal plants as it is more efficient with lower lifecycle power generation costs? Is the plant actually emitting less than what is reasonably expected?

Another contention is defining who needs to buy these rights. Who has the right (and power) to tell countries and companies what is reasonably expected of them to emit and what counts as over-emitting? One solution was the Cap and Trade mechanism, which placed a limit on a country’s allowable emissions. But only some countries agreed to it; there were transparency concerns; and (rightful) criticism that overall the Caps were insufficient to prevent global warming.

While there are varied opinions, ultimately, there is wisdom in the fundamental idea of creating a transparent market that allows people to buy and sell the right to emit as a way to encourage emissions reduction. Getting it right will be transformative.

To do that, we need to revisit the foundation. Carbon trading was built to trade an inherently finite product without properly defining the boundaries of this finite product. The goal of carbon trading is to prevent and mitigate the risk of global warming beyond a certain temperature. So let’s begin with agreeing on the target temperature. 1.5 or 2? And with the current temperature already known, we can calculate the emissions required to hit that target, which becomes the earth’s carbon budget. That in fact is known. Next is to spread this budget into a reasonable and feasible increasingly shrinking annual budget which: accounts for the need to balance energy supply with demand to sustain the economy and civilization; and factors the current availability and realistic growth of cleaner energy sources and energy efficiency. But, that is the ‘easy’ part.

Next is allocating that annual budget to nations, bearing in mind the developmental and economic priorities, progress, and peculiarities of each country, and hopefully favoring nations with lower historical emissions. Think of it as a water scarcity scenario. If there is a finite water supply in the world, would you want a free for all fight for the water, or allocate this supply ‘equitably’? The likely answer will be to allocate, but the difficulty is in the fine print – ‘Equitably’. How do you get 200+ countries with different ideological, political, and economic realities to agree on an ‘equitable’ way to share a finite resource? It’s a difficult task for water which we can see. And even more challenging for the ‘right to emit’ which we cannot see.

But that is the challenge I believe we must meet. That is the foundation for effective carbon trading. Countries that cannot meet their budget can buy carbon budgets from those meeting it. Such a functional trade mechanism will enable carbon pricing and regulated markets for companies and even individuals to trade carbon credits. And if the budgets are skewed to favour historically low emitters (which are largely developing countries), it will create a market-based mechanism to drive climate finance to developing countries who contribute a small fraction of global emissions. That should be better than trying to allocate the proposed (and controversial) $100B annual grant under the Paris Agreement to help developing countries decarbonize. Also, since the budgets are determined with the end in mind, enforcing it and carbon trading will deliver the goal of mitigating the risk of global warming. Finally, as these carbon budgets are going to be increasingly tighter (to meet the limited earth’s carbon budget), improving the efficiency of coal power plants or using CCGTs will be the norm, and will not generate carbon credits.

To enable transparency and trading, we can leverage blockchain technology. Blockchain’s underlying appeal is its ability to create a traceable finite quantity of a product. So, the increasingly shrinking carbon budget becomes a set of blockchains allocated to various countries. But, every country must openly apply standard rules to measure their emissions.

But, there is another hurdle – accountability. Who will guard the guards? Who will hold the US or China or frankly any country to account if they exceed their budget and refuse to buy more? How reasonably can any penalties be enforced? There is no easy answer. But maybe, we can leverage the one financial instrument that is global, debt. Almost every country is indebted to other countries. So if a country exceeds its carbon budget and refuses to buy more, the penalty is a reduction in debts owed to that country commensurate to the carbon credits it should have bought. A binding form of debt relief. That is not a silver bullet, but there is really no silver bullet to climate change.

190+ countries are gathering at Glasgow for the COP26 climate discussions (including carbon trading). I will be waiting for the outcomes. But if carbon trading is to be effective, we need a universally agreed, country-tailored, increasingly shrinking annual carbon budget determined by current and historical realities and tied to Earth’s remaining carbon budget. With a transparent method for accounting emissions and exchanging this finite budget, and a penalty for default perhaps tied to debt relief. But can we get countries with sometimes competing priorities to agree on a binding increasingly restrictive target for the next 30 years that may erode GDP growth in the short term?

As difficult as that may be to imagine, what choice do we have? Especially remembering the common global good. It’s a bit like the joke at the beginning. If we don’t buy the wheelchair now, it will be more expensive for the earth to buy it later. But unlike the man who doesn’t know if he’ll need the wheelchair, we already know that this wheelchair is life-saving.

•Engr. Odinakachi Umunna is an energy and technology professional with 8+ years’ experience in the media industry, public sector, and energy industry. He can be reached at umunnaodinakachi@gmail.com and on LinkedIn

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