Carbon emission trading

ETS-allowance-prices

Map of carbon taxes and emissions trading systems worldwide (2021)

Error creating thumbnail:

2009-11-30 - Chicago Climate Justice activists in Chicago - Cap'n'Trade protest 011

Carbon emission trading, also known as carbon trading or the carbon market, is a form of environmental policy that aims to reduce greenhouse gas emissions, which are a major cause of climate change. It is a market-based approach that allows countries or companies to buy and sell permits to emit carbon dioxide (CO2) and other greenhouse gases. The concept is based on the principle of cap and trade, where a limit (cap) is set on emissions, and market forces determine the most efficient way to achieve the reduction targets.

Overview

Carbon emission trading is built on the idea that creating a cost for emitting carbon will incentivize reductions in emissions. The system allocates or sells a limited number of permits to emit a specific amount of carbon. Entities that reduce their emissions can sell their excess permits to others that need them, thus creating a financial incentive to emit less carbon. The total amount of permits cannot exceed the cap, ensuring that the overall goal of emission reduction is met.

Mechanisms

There are two main types of carbon emission trading systems: cap-and-trade and baseline-and-credit.

• Cap-and-Trade: Under this system, a governing body sets a cap on total emissions and distributes emissions allowances to participating entities. These allowances can be traded, allowing companies that can reduce emissions at lower costs to sell their excess allowances to companies facing higher reduction costs.

• Baseline-and-Credit: This approach does not set a cap but issues credits based on emissions reductions from a baseline level. Companies that reduce their emissions below this baseline can sell credits to others that exceed their baseline emissions.

Market and Pricing

The price of carbon in the carbon market is determined by supply and demand. Factors influencing demand include the stringency of the cap, the cost of alternative technologies for reducing emissions, and economic growth. Supply is influenced by the total number of allowances or credits issued and the availability of cost-effective emission reduction options.

Global Initiatives

Several international and national carbon trading schemes have been implemented around the world. The European Union Emissions Trading System (EU ETS) is the largest and was the first major carbon market. Other notable systems include the Regional Greenhouse Gas Initiative (RGGI) in the United States, the Chinese national carbon trading scheme, and the California cap-and-trade program.

Challenges and Criticisms

Carbon trading faces several challenges, including setting the cap at an appropriate level, ensuring a robust and transparent trading system, and preventing market manipulation. Critics argue that it can lead to carbon leakage, where companies relocate their operations to countries with less stringent emission controls, and that it may not address the root causes of climate change.

Future Directions

The future of carbon emission trading includes expanding existing markets, linking separate systems to create a global market, and increasing the use of innovative technologies to verify and monitor emissions. Enhancing global cooperation and addressing the concerns of developing countries are also crucial for the success of carbon markets.