Step up your decarbonisation game: High emitters on the clock

The world emits about 50 billion tonnes of greenhouse gases (GHGs) every year, according to the Global Carbon Budget. Since tracking began in 1990, the energy sector – which powers manufacturing, buildings, transport, and construction – has been the largest source of GHG emissions.

As the climate crisis intensifies, countries have agreed to limit the global temperature increase to well below 2°C and to pursue efforts to limit it to 1.5°C. To achieve this, GHG emissions must be cut in half by 2030 and reach net zero by mid-century.

How to we start this decarbonisation journey? While governments around the world play a critical role in setting policies and regulations to drive decarbonisation, the private sector has an equally important role to play in complementing government efforts to accelerate the transition to a low-carbon economy.

Market mechanisms driving decarbonisation

In parallel with global efforts to curb emissions, new pathways and mechanisms have emerged that compels companies to reduce their carbon footprint. Some of the key mechanisms include:

• Carbon taxes: It sets a price on carbon emissions released from the burning of fossil fuels. According to research, this mechanism is touted as an effective way to reduce GHG emissions globally, as higher taxes on carbon-based fuels encourage producers and consumers to switch to renewable energy sources and other low-carbon solutions.
• Emissions Trading Schemes (ETS): Also known as “cap and trade”, the system limits overall emissions and allows companies to buy or sell permits to emit. These permits can be obtained from the government or by trading with other companies. Over time, the cap is lowered to ensure a reduction in emissions, ultimately aiming to reduce man-made GHG emissions that contribute to climate change. Companies that do not have enough permits to emit must either reduce their emissions or buy additional permits. Each permit typically represents one tonne of carbon dioxide (CO2), based on its market value.

As of 2024, there are 110 carbon pricing initiatives in place, including 36 ETS, 39 carbon tax initiatives, and 35 domestic crediting mechanisms.

Emerging mechanism to curb carbon leakage

The Carbon Border Adjustment Mechanism (CBAM) is an emerging policy to address carbon leakage. It is a common phenomenon where production is relocated to countries with less stringent environmental regulations. Unlike carbon taxes and ETS, the CBAM works by imposing a fee on imports of carbon-intensive products. Through the CBAM, the European Union (EU) ensures a more level playing field between domestic and imported products.

The mechanism encourages producers to reduce their carbon footprint to avoid additional costs. Since its implementation, the CBAM has gained prominence for its potential to reshape global trade patterns.

While carbon taxes put a fixed price on emissions and ETS creates a market for emission permits, the CBAM focuses on the border, charging a fee based on the carbon embedded in imported products. It initially targets high-emitting sectors such as cement, fertilisers, iron and steel, and aluminium. All the mechanisms can work together, with the CBAM complementing existing domestic climate policies.

Decarbonisation is only the first step

Reducing emissions remains a critical focus for many organisations, more so for high-emitting sectors facing scrutiny and regulatory pressure. While companies are at different stages of their sustainability journey, decarbonisation is the basis for broader transformation. To integrate climate action into core business strategies and drive meaningful change, organisations need to commit to investment, data management, strategic roadmaps, and comprehensive planning.

As more companies, industries, and governments take a proactive role in mitigating climate change, market-based mechanisms are recognised as effective tools to drive decarbonisation. By meeting the requirements outlined in these mechanisms, companies can accelerate their progress towards net-zero emissions by bridging the gap between aspirational goals and practical actions.

To get sustainability right, companies need to prioritise to regulatory changes and market trends, and actions. Here’s how: