How does carbon
trading work? Does it really help tackle climate change? Is it all
just smoke and mirrors? Is the Kyoto Protocol doing any good?
||As the evidence for global warming mounts, scientists
tell us more of the drastic climatic changes we can expect.
With heightening pressure for economic measures to rein in greenhouse
emissions, questions such as these are, increasingly, being
The short answer is that carbon trading - under the Kyoto Protocol
and in voluntary markets - is starting to work to reduce emissions.
However, there are certainly some problems and inefficiencies that
have hampered efforts to bed-down schemes in the early years.
Let's start with the basics of how greenhouse-gas emissions markets
- or carbon trading - is designed to work.
The idea is that, first, governments set annual targets for the
reduction of greenhouse gas emissions for industry - and, perhaps
agriculture - in their countries. These targets, or caps, limit
overall emissions to a set level, measured in millions of tonnes.
Second, the overall target amount is divided up among all
the major emitters in the economy, so that each industry sector
- and then each factory or plant within each sector - knows
how many tonnes it can emit each year.
Emission permits, or allowances, are issued to cover these
amounts. Each permit confers the right to emit one tonne of
carbon dioxide, or the global warming equivalent in other
greenhouse gases, into the atmosphere.
Then, a trading scheme is applied which establishes a market
for these permits, allowing emitters and financial players
to buy and sell them.
This is 'emissions trading' and gives emitters flexibility
in how they meet their individual targets. Instead of having one
rigid emissions limit to stick to - and a fine, if you exceed it
- emitters can choose to emit more than their target and buy the
excess allowances of another emitter which does not need all its
The system, therefore, also encourages companies to beat their
targets and lower their emissions as much as possible - the more
permits they don't use, the more money they can make from selling
In this way, a market ensures that the overall national target
for reducing emissions is met because there is only a finite and
limited number of permits on issue. However, how the target is met,
varies with flexibility given to emitters to ease the overall burden
on industry and the economy.
To make it even more flexible, most emissions trading schemes also
offer trade in a second type of instrument - offsets or carbon credits.
As well as buying the excess permits of others, emitters can also
pay someone else - outside the scheme - to cut their emissions instead.
If it is cheaper to pay someone in China to plant a forest to absorb
carbon dioxide, or a factory in India to install clean technology
to cut its emissions of greenhouse gases, then doing so under an
approved method will generate carbon credits. Again, one credit
equals one tonne of emissions saved. These credits can then count
towards the emitter's target back home.
Of course, it relies on a number of things to work -
The use of offsets recognises that all emissions go into the
one atmosphere and that it is not as important where emissions
are cut, as that they are cut somewhere. However, the use of
offsets is usually limited to a small proportion - often 5 to
10 per cent - of the overall emissions target, to ensure that
emitters are making a significant contribution to controlling
their own emissions and are not just buying their way
out of their obligations.
This two-fold system of 'carbon trading' is seen by many
as the most flexible and cost-effective way of lowering greenhouse
emissions - so that, over coming decades, the world can stabilise
the concentration of greenhouse gases in the atmosphere and
limit global warming at levels that will not cause catastrophic
- Accurate measurement of existing and future emissions at a local,
national and, eventually, global level
- All nations - especially the industrialised countries which
have long had high emissions - committing to emissions reduction
- Proper verification of carbon offset projects to ensure that
emissions reductions have taken place, have done so directly because
of an offset agreement and that the resulting emission savings
are only counted once.
So that's the theory - now for the practical.
Some opponents of carbon markets say that they just don't work in
practice. It's true to say that there are flaws and teething problems
in the way carbon markets are working in their early, formative
years. However, an objective analysis would show that, despite these
glitches, there is evidence that carbon markets can and are working.
With the commitment period of the Kyoto Protocol (2008-2012) yet
to begin, there are, as yet, only two significant legally-binding
carbon markets in full operation - the EU's ETS and Kyoto's main
offsets scheme, the Clean Development Mechanism (CDM). However,
already, 770 million tonnes of emission reductions are underway
under the CDM. Between 1.5 and 2 billion tonnes of emission savings
are expected to be delivered - in all - by the end of the Kyoto
commitment period in 2012 - all monitored and verified according
to strict rules laid down by the UN.
The EU Emissions Trading Scheme is, as yet, the only major scheme
of its type in operation although many are being planned in US states,
Canada, Japan, Australia and New Zealand. The EU ETS has almost
competed its trial phase ahead of the Kyoto period. This trial phase
has not led to cuts in emissions because allocations to factories
were not tight enough.
| Allocations, now being made for the next phase - the crucial
Kyoto phase, indicate that European industry will cut its emissions
by 9 per cent, compared to thefigure that industry would have
emitted under their original plans.
In May 2007, a group of environmental economists published
an independent study of the EU ETS in the Review of Environmental
Economics and Policy.
In that study, they concluded that the scheme was reducing
emissions and was 'by far the most significant accomplishment
in climate policy to date' worldwide.
Voluntary markets, mainly dealing in offsets, are another story
and have attracted criticism for the lack of verification of actual
emission cuts. In some cases, these concerns are entirely valid.
These markets cater for companies, organisations and individuals
who decide of their own accord to offset their emissions. Because
this is not part of a compulsory scheme imposed by government, there
is, generally, no authority regulating standards for projects generating
carbon offset credits.
It is clear that, in some cases, firms offering carbon credits have
taken money for credits they have generated from projects where
the emission reductions are dubious.
Regulation will grow in the voluntary market and, indeed, there
are already reputable international accreditation schemes which
voluntary buyers of offset credits should look out for. The Swiss-based
Gold Standard and Voluntary Carbon Standard - backed by a large
group of international aid and environmental organisations - is
perhaps the best and provides third party verification of emission
reduction claims from projects. The Chicago Climate Exchange ensures
verification of offsets traded through it, while more accreditation
schemes are popping up around the world.