“We have to wake up to the fierce urgency of the now.”
–Jim Yong Kim, President, The World Bank
Climate protection poses many challenges for politicians, policymakers, institutions, companies, and governments. Sustainable reductions in Carbon Dioxide (CO2) emissions from all economic sectors are required and must be achieved quickly. Some countries have committed to reducing emissions to the level needed to keep the global average temperature rise below 2°C, a considerable reduction from current emissions levels in developed countries. For example, the United Kingdom has set a legally enforceable goal of reducing national greenhouse gas (GHG) emissions by 80% by 2050. It implies a 4% annual decrease in emissions until 2050, a pace of change exceeding anything accomplished thus far despite many years of UK and EU strategies to cut energy usage and carbon emissions. New measures are likely to be necessary to assist governments in meeting their ambitious reduction objectives. Carbon Trading (CT) is a forward-thinking policy concept that may provide a national and international framework for reducing emissions in the mid-to-long term if implemented properly.
So, what is Carbon Trading, and how does it work? What exactly is it that is being traded? Who is trading, why are they trading, and how do they trade? Who benefits, and how does it relate to climate change mitigation?
Carbon trading is a market-based system to reduce greenhouse gases that contribute to global warming, particularly the carbon dioxide emitted from the burning of fossil fuels. Carbon trading allows countries to reduce their carbon emissions and sell the emissions saved to other countries. The saved carbon is sold in exchange for money, technology, or investment in projects. Carbon markets existed under the Kyoto Protocol, which will be replaced by the Paris Agreement in 2020. For example, A developed country like the USA, which is unfit to meet its reduction target, can provide money or technology at the Tidal Energy project in Indonesia and thus claim the reduction in emissions as its own.
Carbon trading is divided into two types: ‘cap and trade’ and ‘offsetting’. Governments or international organizations provide polluting licenses (or ‘carbon permits’) to significant industries under cap and trade. Instead of cleaning up their act, a polluter could swap those permits for one that can make “one-size-fits-all” changes for less money. It is a concept that underpins the EU’s Emissions Trading Scheme (EU ETS), which had a market value of US$ 63 billion in 2008 and is fast growing.
Offsetting, instead of lowering emissions at the source, corporations, international financial institutions, governments, and individuals, funds “emissions-saving activities” outside the capped zone. The UN-administered Clean Development Mechanism (CDM) is the largest of these schemes, with about 1,800 registered projects as of September 2009 and over 2,600 more awaiting clearance. Based on current values, credits generated by authorized schemes might yield more than US$ 55 billion by 2012. Pollution persists in one site in the idea that a comparable reduction in emissions will occur elsewhere. The initiatives that qualify as ’emissions savings’ range from the construction of hydroelectric dams to the capture of methane from industrial livestock operations.
Since its acceptance as part of the Kyoto Protocol, carbon trading has become one of the world’s major commodities markets. In India, the carbon trading market is developing faster than the IT, biotechnology, and BPO industries combined. There are over 850 projects in the pipeline with a total investment of Rs 650,000 million. Carbon is presently traded on the Multi Commodity Exchange in India. It is Asia’s first carbon credit trading market.
