Carbon trading is a market-based approach to control greenhouse gas (GHG) emissions, mainly carbon dioxide, and other GHG gases. Carbon trading can be described as an arrangement in which a limit is placed on the quantity of GHG emissions that an entity or group of entities may emit. If an entity is able to limit its GHG emissions to a level lower than its allocated allowance, it can sell the extra allowances to other entities that have exceeded their allowance limits, or to those who are looking for additional GHG emission allowances. The buying and selling of carbon credits is a key feature of carbon trading.
Carbon trading is based on the principle that the parties responsible for GHG emissions should bear the cost of reducing those emissions. This mechanism creates a market for carbon emissions that enables governments, companies, and other entities to buy and sell carbon credits in order to meet their regulatory obligations or voluntarily reduce their carbon footprint.
The Kyoto Protocol, an international treaty signed in 1997, was the first to formally establish carbon trading as a mechanism to reduce GHG emissions. The protocol allowed countries to buy and sell carbon credits to meet their emissions reduction targets.
The concept of carbon trading has evolved since then, with various governments and organizations adopting carbon trading as a policy tool to reduce GHG emissions. This article explores the details of carbon trading, including its history, mechanics, and potential benefits.
History of Carbon Trading
The concept of carbon trading dates back to the 1970s when the United States Environmental Protection Agency (EPA) introduced a cap-and-trade program to control sulfur dioxide (SO2) emissions. The EPA was looking for an innovative approach to tackle acid rain, which was caused by SO2 emissions.
The cap-and-trade program worked by placing a limit on the amount of SO2 emissions a facility was allowed to produce. Facilities that were able to reduce their emissions below their allocated allowance could sell the excess allowances to other facilities that were unable to comply with the limit. This system provided a financial incentive for facilities to reduce their emissions.
Following the success of the cap-and-trade program in reducing SO2 emissions, the concept of carbon trading emerged as a mechanism to control carbon dioxide (CO2) emissions. The first international treaty to use carbon trading as a mechanism to reduce GHG emissions was the Kyoto Protocol, which was adopted in 1997.
The Kyoto Protocol required developed countries to reduce their GHG emissions by an average of 5% below 1990 levels during the period from 2008 to 2012. The treaty allowed countries to use carbon trading as a mechanism to meet their emissions reduction targets. Countries that exceeded their targets could sell their excess allowances to countries that were unable to meet their targets.
Since the adoption of the Kyoto Protocol, various carbon trading schemes have emerged across the world. These schemes include the European Union Emissions Trading System (EU ETS), the California Cap-and-Trade Program, the Regional Greenhouse Gas Initiative (RGGI), and the New Zealand Emissions Trading Scheme.
Mechanics of Carbon Trading
Carbon trading involves the buying and selling of carbon credits. A carbon credit represents one tonne of CO2 equivalent (CO2e) emissions that have been avoided or removed from the atmosphere. Carbon credits can be earned through activities that reduce GHG emissions, such as the implementation of energy-efficient technologies, the use of renewable energy sources, or the implementation of carbon capture and storage technologies.
A carbon credit is a tradable commodity that can be bought and sold in carbon markets. Carbon markets are established by governments or private organizations to facilitate the trading of carbon credits. In a carbon market, buyers and sellers can trade carbon credits based on their supply and demand.
The mechanics of carbon trading involve several key steps:
- Setting Emissions Caps: The first step in carbon trading is to establish emissions caps, or limits, on the total amount of greenhouse gas emissions that are allowed within a certain jurisdiction, such as a country or region. These caps are often set by governments or international organizations, based on scientific research and climate change modeling.
- Issuing Carbon Credits: Once emissions caps have been established, carbon credits are issued to companies or other entities that are covered by the caps. Each credit represents a certain amount of greenhouse gas emissions that the entity is allowed to produce. These credits are typically issued by government agencies or international organizations, and can be bought and sold on the carbon market.
- Trading Carbon Credits: After carbon credits have been issued, they can be traded on the carbon market. Buyers may include companies or organizations that need to offset their own emissions, or that wish to invest in renewable energy projects or other carbon reduction initiatives. Sellers may include companies or other entities that have earned excess credits through emissions reductions or other initiatives.
- Verifying Emissions Reductions: To ensure that carbon credits represent real emissions reductions, they must be verified by an independent third party. This process involves evaluating the emissions reduction project or initiative, and determining whether it meets specific criteria for emissions reductions, additionality, and other factors.
- Retirement of Carbon Credits: Once carbon credits have been used to offset emissions, they are retired or removed from circulation. This ensures that the emissions reduction is not double-counted, and that the entity that purchased the credits is receiving the full environmental benefit of the offset.