Carbon trading and climate policy: Insights from COP28

The entire world is getting ready for an epic conversation about the urgent issue of reducing the use of fossil fuels as they gather in Dubai for the 28th Conference of Parties (COP 28). I was inspired by a news report from Al Jazeera, specifically the part where it was emphasized that a disagreement arises when countries in the Global South contend that wealthier countries should be at the forefront of the transition because they have produced and used fossil fuels to a larger extent in the past. This stance delays negotiations further. I am incorporating aspects of International Political Economy to explore how global economic structures and power relations shape the policies and outcomes of climate diplomacy.

Through the sequence of COP meetings held under the umbrella of the United Nations Framework Convention on Climate Change (UNFCCC), the development of global efforts to tackle climate change may be tracked. These conferences have been essential forums for countries to debate and create agreements targeted at reducing the effects of climate change since the UNFCCC was founded in 1994 (UNFCCC, 2019). The conversations have changed over time from establishing general objectives to making more specific and legally binding promises. Over the years, the meetings built up heated debates, reflecting the attempt of the international community to strike a balance between environmental concerns and the realities of economic and geopolitical situations among countries.

As Al Jazeera reported, when Majid Al Suwaidi, the Director General of the United Arab Emirates, revealed a draft statement intended to “spark conversations.” Eight nonbinding options for countries to consider in reducing emissions were presented in this document, which was designed to direct discussions at COP 28. The release of this draft statement initiated the discussions surrounding climate action’s increasing urgency.

The contrast in diverse responses on the other hand, highlighted how difficult it is to reach an agreement in a place where majority participation is required with some countries calling the agreement “too weak” and some calling for a total phase-out. The context for COP 28 is being shaped by the fallout from COP 26 in Glasgow in 2021. Significant disagreements were raised at the meeting, such as the weak pledge to “phase out” coal, which then led to a last minute decision to “phase down”, which provoked anger among participants (Evans et al., 2021). These reactions to the draft statement reflect a situation that will impact the discussions at COP 28, where there will be intense competition for the narrow path between environmental demands and economic factors.

Fossil Fuel Production in Political Economy Power Play

BP’s Statistical Review of World Energy for 2021 provides a comparison of how the world’s persistent reliance on fossil fuels will negatively impact international efforts to fight climate change[1]. 8 billion tonnes of coal, 4 billion tonnes of oil, and more than 4 trillion cubic meters of natural gas are produced  annually, which highlights the huge challenge of moving away from a century-long reliance on these resources (Ritchie & Rosado, 2022).  This data supports the international political economy framework, which emphasizes state-centric power dynamics and provides insight into the interactions between countries competing for supremacy in the energy sector.

The production breakdown by country reveals how fossil fuel funds have affected geopolitical dominance. China, responsible for half of the world’s coal production and consumption, becomes an important actor with major influence over the dynamics of the global energy system (Bhutada, 2023). While the US is the world’s leading producer of natural gas and one example of the complex relationship between energy dominance and global influence (Ritchie & Rosado, 2022).  The fact that the US, Russia, and Saudi Arabia control the majority of oil output at the same time showed their strategic value in determining the direction of the world economy.

Additionally, this data is an essential start to understanding the economical power gaps that dominate conversations at COP 28. The drop in coal production in the US, caused by the shift to renewable energy, underlines the fine line that must be drawn between the needs of the environment and economic interests.  As COP 28 talks about the need to cut back on fossil fuel consumption, these data of production provide evidence of the powerful interests that delay a rapid transition to sustainable alternatives. In international relations, where power dynamics, economic factors, and historical ties come together is reflected in the “tug of war” between nations over the production of fossil fuels (Arezki & Matsumoto, 2017).

Carbon Trading and Multinational Corporations of Fossil Fuel

In cooperating the concept of International Political Economy into the dynamic of COP 28 discussions, we need to focus on how global markets, multinational corporations, and international financial institutions shape climate diplomacy. Global markets have a significant impact on the financial incentives for countries to adopt certain climate policies. One market-based strategy to lower greenhouse gas emission is carbon trading. Carbon trading works by placing a price on carbon, aims to make countries and companies financially motivated to lower their emissions. One of the example of how international markets influence countries in order to meet the target of reducing carbon emissions is the European Union Emissions Trading System (EU ETS).

Carbon trading also impacts consumers by influencing the cost of goods and services. It impacts household budgets as wehen companies that need to purchase more carbon credits, might pass these expenses through to customers. On the other hand, companies that invest in “green technologies” can experience long-term cost savings from already reduced operating expenses, which might result in lower consumer prices. The EU ETS system has already made an impact leading to significant investments in renewable energy and energy efficiency within the EU. This demonstrates how the global market can drive environmental policy.

Multinational corporations (MNCs) also have a big impact on climate policy. The revenues of these corporations that surpass the GDP of developing countries, can lobby for policies that favor their interests. In the past, MNC’s like major oil company Shell have also lobbied against demanding environmental regulations to protect their financial interests in the fossil fuel industry. This is done because the transition away from fossil fuel affects the job market. In regions that are dependent on coal mining, for example, can lead to job losses unless there are alternative regulations in place for economic diversification. The relations of economic power and political decision-making can be seen as countries are reluctance to commit fossil fuel reduction significantly because of the influence of these MNC’s

The complex background of COP 28 becomes clear when one follows the development of COP summits since 1994. In climate diplomacy, the principles of IPE highlights how fossil fuel dependence, geopolitical control, and market mechanisms like carbon trading influence countries policies. The generation of fossil fuels is examined to highlight the huge responsibility of moving away from a century-long dependence on these resources.The Global South’s call for equitable fossil fuel phase-out underscores the need for fairness. The involvement of multinational corporations shapes climate decisions, as well as impact economies and communities worldwide.

[1] BP’s Statistical Review of World Energy: The Statistical Review of World Energy analyses data on world energy markets from the prior year. The Review has been providing timely, comprehensive and objective data to the energy community since 1952. BP. (2022). Statistical Review of World Energy 2022.

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