Bridging the Gap How to Finance the Net Zero Transition 2025

Emissions trading instruments FIGURE 1 Policy creates obligation to surrender permits1 2 3 4Policy limits number of permits in circulation by setting an economy-wide cap Policy allows the trading of permits among firms in the economy Exchanges facilitate the trading of permits as financial instruments TimeBaseline-and-creditCap-and-tradeEmission permitsGreenhouse gas emissions Greenhouse gas emissions Firm B AFirm A£Cap set on the total amount of GHGs that can be emitted per firmFirm B (which has emitted more than its cap) buys permits to compensate from Firm A (which has emitted less than its cap) Independent auditor verifies and certifies emission reductions. Permits corresponding to reductions are issued3 Emissions from the implementation of project are monitored (project emissions)2Establish the level of emissions in a business-as-usual scenario (baseline emissions)1Can be linked by trading issued permits in cap-and-trade scheme Source: Carbon Markets, University of Edinburgh Business School. Policy-makers must address potential issues such as double counting and maintain a balance between supply and demand that supports policy aims. Specifically, events such as the oversupply- induced decline in the price of carbon financial instruments (CFIs) traded in the EU’s signature cap-and-trade scheme, the EU-ETS, in 2006, can be avoided by establishing clear rules for issuing, trading and retiring certificates, as well as through the development of reliable tracking systems. Additionally, integrating the schemes with other policies and ensuring stakeholder participation can enhance their effectiveness in promoting sustainability goals.110 However, while cap-and-trade and baseline- and-credit schemes often become intertwined organically, leading to the exchange of credits across schemes, integrating them with other schemes often presents challenges. Too many policies to address the same overarching challenge can be detrimental to the success of the individual policy instruments. A case in point is the situation in Europe, a continent that has no shortage of policies aimed at engendering a low-carbon economy. A review of energy efficiency initiatives and instruments conducted by Ibikunle and Okereke111 found that the UK and Germany each have approximately 100 different instruments that are often duplicated and ineffectively implemented. Bridging the Gap: How to Finance the Net-Zero Transition 17