Navigating carbon markets

As the first half of 2023 comes to an end, the undeniable reality of climate change is clearer than ever. The global climate crisis has reached a critical tipping point, as experts highlight the need for urgent action. In response, the EU has demonstrated its commitment to this crisis by seeking to reduce carbon emissions through various measures. Most notably, the EU has pioneered one of the world’s largest compulsory carbon credit markets that prices in the negative externality of greenhouse gas emissions. 

At its core, the EU Emissions Trading System (ETS) operates as an annually diminishing “cap and trade” mechanism, setting a limit on emissions for these sectors and subsequently issuing allowances for these emissions, tradeable on the carbon market. The system incentivises companies to curtail their carbon footprint, as those emitting less than their allowances can profit by trading surplus allowances with those exceeding their quotas. Already accounting for approximately 40% of greenhouse gas emissions in Europe, the EU ETS extends to energy-intensive sectors like oil refineries, steel, cement, glass, paper production, commercial aviation and as of June 2023, maritime transport and shipping.

To date, Malta has been minimally involved in the carbon market due to the absence of significant energy-intensive industries. However, the European Commission has further proposed expanding emissions trading to other sectors, including road transport, heating and cooling for buildings, and implementing more demanding laws relating to the aviation industry. As a result, along with the recent inclusion of the maritime sector, Malta finds itself at a pivotal juncture in the transition towards a low-carbon future. Embracing these new regulations, and recognising them as opportunities, Maltese companies have the chance to actively participate in carbon trading, promoting sustainable practices and contributing to global emission reduction goals. 

Beyond those official sectors, however, the voluntary carbon market is also growing rapidly in importance as those companies that fall outside the scope of the EU ETS set net-zero targets. As part of this commitment, many companies are seeking to purchase carbon offsets to claim carbon neutrality. Carbon credits allow companies to offset their carbon emissions that would otherwise have been challenging to address by allowing them to invest in projects that reduce an equivalent amount of carbon elsewhere, such as through reforestation, building renewable energy, carbon-storing agricultural practices, the list goes on.