CARBON TRADING: A PERCEPTUAL STUDY 1. INTRODUCTION Global warming has spawned a new form of commerce: the carbon trade. This new economic activity involves the buying and s elling of “environmental services ,” including the removal of gr eenho use gases fr om the atmosphere, which ar e identified and purchased by eco-consulting firms and then sold to individual or corporate clients to “offset” their polluting emissions. While some NGOs and “green” businesses favor the carbon trade and view it as a win-win solution that reconciles environmental protecti on with economic prosperity, other environmentalists and grassroots organizations claim that it is no solution to environmental problems such as global warming. Carbon Trading is a market based mechanism for helping mitigate the increase of CO 2 in the atmosphere. Carbon tradingmarkets are developing that bring buyers and sellers ofcarbon credits together with standardized rules of trade. Carbon trading is a practice which is designed to reduce overall emissions of carbon dioxide, along with other greenhouse gases, by providing a regulatory and economic incent ive. In fa ct, the te rm “c ar bon tr ading” is a bi t mi sl eadi ng, as a number of greenhouse emissions can be regulated under what are known as cap and trade systems. This pr acti ce is part of a sy st em which is colloquially refe rr ed to as a “c ap and tr ade.” Under a cap and trade system, a gover nment sets a national goal for tota l greenhouse gas emissions over a set period of time, such as a quarter or a year, and then allocates “c re dits ” to companies which allow them to emit a certai n amount of greenhouse gases. If a company is unable to use all of its credits, it can sell or trade those credits with a company which is afraid of exceeding its allowance. Car bon tra ding provides a ver y obvious inc ent ive for companies to imp rove the ireffic iency and reduce their greenhouse gas emis sions , by turning such reduct ions into a physical cash benefit. In addition, it is a disincentive for being inefficient, as companies are effectively penalized for failing to meet emissions goals. In this way, regulation is
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Global warming has spawned a new form of commerce: the carbon trade. This new
economic activity involves the buying and selling of “environmental services,” including
the removal of greenhouse gases from the atmosphere, which are identified and
purchased by eco-consulting firms and then sold to individual or corporate clients to
“offset” their polluting emissions. While some NGOs and “green” businesses favor the
carbon trade and view it as a win-win solution that reconciles environmental protection
with economic prosperity, other environmentalists and grassroots organizations claim that
it is no solution to environmental problems such as global warming.
Carbon Trading is a market based mechanism for helping mitigate the increase of CO2 in
the atmosphere. Carbon trading markets are developing that bring buyers and sellers of
carbon credits together with standardized rules of trade.
Carbon trading is a practice which is designed to reduce overall emissions of carbon
dioxide, along with other greenhouse gases, by providing a regulatory and economic
incentive. In fact, the term “carbon trading” is a bit misleading, as a number of greenhouse emissions can be regulated under what are known as cap and trade systems.
This practice is part of a system which is colloquially referred to as a “cap and
trade.” Under a cap and trade system, a government sets a national goal for total
greenhouse gas emissions over a set period of time, such as a quarter or a year, and then
allocates “credits” to companies which allow them to emit a certain amount of
greenhouse gases. If a company is unable to use all of its credits, it can sell or trade those
credits with a company which is afraid of exceeding its allowance.
Carbon trading provides a very obvious incentive for companies to improve their
efficiency and reduce their greenhouse gas emissions, by turning such reductions into a
physical cash benefit. In addition, it is a disincentive for being inefficient, as companies
are effectively penalized for failing to meet emissions goals. In this way, regulation is
according to the law of demand. Corporations can also prematurely retire allowances by
donating them to a nonprofit entity and then be eligible for a tax deduction.
Because an emission trading uses markets to address pollution, it is often touted as an
example of free market environmentalism. However, emissions trading require a cap to
effectively reduce emissions, and the cap is a government regulatory mechanism. After a
cap has been set by a government political process, individual companies are free to
choose how or if they will reduce their emissions. Failure to reduce emissions is often
punishable by a further government regulatory mechanism, a fine that increases costs of
production. Firms will choose the least-costly way to comply with the pollution
regulation, which will lead to reductions where the least expensive solutions exist, while
allowing emissions that are more expensive to reduce.
1.3 HISTORY OF CARBON TRADING
The efficiency of what later was to be called the “cap-and-trade” approach to air
pollution abatement was first demonstrated in a series of micro-economic computer
simulation studies between 1967 and 1970 for the National Air Pollution Control
Administration (predecessor to the United States Environmental Protection Agency's
Office of Air and Radiation) by Ellison Burton and William Sanjour. These studies usedmathematical models of several cities and their emission sources in order to compare the
cost and effectiveness of various control strategies. Each abatement strategy was
compared with the “least cost solution” produced by a computer optimization program to
identify the least costly combination of source reductions in order to achieve a given
abatement goal. In each case it was found that the least cost solution was dramatically
less costly than the same amount of pollution reduction produced by any conventional
abatement strategy. This led to the concept of “cap and trade” as a means of achieving
the “least cost solution” for a given level of abatement. The development of emissions
trading over the course of its history can be divided into four phases:
A carbon credit is a generic term for any tradable certificate or permit representing theright to emit one tones of carbon or carbon dioxide equivalent (CO2-e).
Carbon credits and carbon markets are a component of national and international attempts
to mitigate the growth in concentrations of greenhouse gases (GHGs). One carbon credit
is equal to one ton of carbon dioxide, or in some markets, carbon dioxide equivalent
gases. Carbon trading is an application of an emissions trading approach. Greenhouse gas
emissions are capped and then markets are used to allocate the emissions among the
group of regulated sources. The goal is to allow market mechanisms to drive industrial
and commercial processes in the direction of low emissions or less carbon intensive
approaches than those used when there is no cost to emitting carbon dioxide and other
GHGs into the atmosphere. Since GHG mitigation projects generate credits, this
approach can be used to finance carbon reduction schemes between trading partners and
around the world.
There are also many companies that sell carbon credits to commercial and individual
customers who are interested in lowering their carbon footprint on a voluntary basis.
These carbon offsetters purchase the credits from an investment fund or a carbon
development company that has aggregated the credits from individual projects. The
quality of the credits is based in part on the validation process and sophistication of the
fund or development company that acted as the sponsor to the carbon project. This is
reflected in their price; voluntary units typically have less value than the units sold
through the rigorously validated Clean Development Mechanism.
1.1.2 Background
Burning of fossil fuels is a major source of industrial greenhouse gas emissions,
especially for power, cement, steel, textile, fertilizer and many other industries which rely
on fossil fuels (coal, electricity derived from coal, natural gas and oil). The major
A cap and trade system is a method for managing pollution, with the end goal of reducing
the overall pollution in a nation, region, or industry. Many proponents of pollution
control support the concept of cap and trade systems, arguing that they are extremely
effective, and that they make sense economically as well. Such a system is only one
option among many for reducing the emission of pollutants, most notably carbon dioxide,
a greenhouse gas which has attracted a great deal of attention due to its environmental
impacts.
Under a cap and trade system, a government authority first sets a cap, deciding howmuch pollution in total will be allowed. Next, companies are issued credits, essentially
licenses to pollute, based on how large they are, what industries they work in, and so
forth. If a company comes in below its cap, it has extra credits which it may trade with
other companies.
For companies which come in below their caps, a cap and trade system is great, because
they can sell their extra credits, profiting while reducing their pollution. For companies
which cannot get their pollution under control, a cap and trade system penalizes them for
their excess pollution while still bringing overall pollution rates down. In a sense, the
need to purchase credits acts as a fine, encouraging companies to reduce their emissions.
Cap and trade has largely been successful in reducing the emissions of pollutants. Its
enactment came to place after growing concern over global warming and its irreversible
damage to the environment. Ever since the government intervened by introducing the
cap, global warming and the cap and trade program are still hotly debated among
scientists, politicians and those in the energy industry. Consensus shows global warming
is real, but the seriousness of the issue and whether or not humans are the cause of global
warming are still debatable. Even among scientists, there is disagreement. Climatologists
are unanimous in their belief that humans are the primary cause for global warming, but
petroleum geologists and meteorologists are not as certain.
This leads to the question whether or not our preventative actions are enough to reduce
the effects of global warming. Are we concerned enough as we should be? The cap and
trade program is a step in the right direction towards building environmentally-conscious
fuel industries. But can the cap and trade program meet its ambitious goal to reduceemissions by 80% in 2050? This site will have detailed information on cap and trade, the
different programs that exist today in the U.S. and in the world and future programs that
are being planned.
The site is intended to give an objective view of the impact of carbon trading from an
environmental and business stand point. The science behind carbon emissions will also
be explained. Also a discussion about how emissions are measured and regulated today
will be here. Some of the concerns over existing carbon trading programs are also
discussed such as the distribution of credits and offsets and whether or not cap and trade
is promoting cleaner fuel technologies.
In short, cap and trade is a market-based policy tool for protecting human health and the
environment by controlling large amounts of emissions from a group of sources. The
government initiates a cap and trade program by having Congress set a cap, or maximum
limit, on all global warming emissions. The cap is intended to be lowered within a set
time frame to achieve the eventual goal of lowering emissions. Sources such as electric
utilities and oil refineries then receive authorizations to emit in the form of emissions
allowances, with the total amount of allowances limited by the cap. These allowances are
attained by initial auction or by trading from other sources in the form of carbon credits.
A carbon credit is equivalent to a ton of carbon dioxide emissions or equivalent
trading buy and sell contractual commitments or certificates that represent specified
amounts of carbon-related emissions that either:
• are allowed to be emitted;
• comprise reductions in emissions (new technology, energy efficiency, renewable
energy); or
• comprise offsets against emissions, such as carbon sequestration (capture of carbon in
biomass).
People buy and sell such products because it is the most cost-effective way to achieve an
overall reduction in the level of emissions, assuming that transaction costs involved inmarket participation are kept at reasonable levels. It is cost-effective because the entities
that have achieved their own emission reduction target easily will be able to create
emission reduction certificates "surplus" to their own requirements. These entities can
sell those surpluses to other entities that would incur very high costs by seeking to
achieve their emission reduction requirement within their own business. Similarly, sellers
of carbon sequestration provide entities with another alternative, namely offsetting their
emissions against carbon sequestered in biomass. (The Carbon Trade, BBC News,
Thursday 20 April 2006).
There are two kinds of carbon trading. The first is emissions trading. The second is
trading in project-based credits. Often the two categories are put together in hybrid
trading systems. (Carbon Trading, 2006.’Made in USA’-A Short History Of Carbon
Trading)
1.1.7 EMISSIONS TRADING
Emissions’ trading is also sometimes called ‘cap-and-trade’. A cap and trade system is an
emissions trading system, where total emissions are limited or 'capped'. The Kyoto
Protocol is a cap and trade system in the sense that emissions from Annex B countries are
capped and that excess permits might be traded. However, normally cap and trade
Personal carbon trading has been the subject of academic study for over a decade, but it
Is yet to be seen as a truly viable policy. Its potential is undeniable, but this enticingly
Simple idea has grown into a tangle of different proposals and has come up against
genuine obstacles. However, where incentives to useful behavioral change by individuals
remain disappointingly elusive, personal carbon trading has great potential as a policy
tool.
Disadvantages Of Carbon
Carbon is the common denominator in all-polluting gases that cause global warming.
Carbon dioxide is the gas most commonly thought of as a greenhouse gas; it is
responsible for about half of the atmospheric heat retained by trace gasses. It is produced
primarily by burning of fossils fuels and deforestation accompanied by burning and
biodegradation of biomass. Analyses of gas trapped in polar ice samples indicate that pre-
industrial levels of CO2 in the atmosphere was approximately 260 parts per million. Over
the last 300 years, this level has increased to current value of around 375 ppm; most of
the increase by far has taken place at an accelerating pace over the last 100 years. About
half of the increase in carbon dioxide in the last 300 years can be attributed todeforestation, which still accounts for approximately 20% of the annual increase in this
gas. It is estimated that if the carbon increases in the atmosphere at the present rate and
no positive efforts are pursued, the level of carbon in the atmosphere would go up to
800–1000 ppm by the end of current century, which may create havoc for all living
creatures on earth (Current science, vol 91, No. 7,10 October 2006).
Various firms scour the world in search of environmental services that could offset its
client’s emissions. These services are usually forests and tree-planting projects and are
known in the business as carbon assets or carbon sinks, because trees remove carbon
from the atmosphere and sequesters it in their wood. The activity of these sinks is often
Various studies had been conducted regarding the concept of carbon trading, emission of
carbon in the environment, their impact on environment & ways for reducing carbon
emission. Some of these studies are mentioned below:
1. Les Coleman showed his growing interest in carbon emissions trading to reduce the
concentration of greenhouse gases in the atmosphere. It identifies the objectives and
performance criteria of a price mechanism to regulate global emissions, and then
compares the two most commonly proposed solutions, which are a carbon tax and
emissions trading. The analysis concludes the more efficient policy is to set emission
limits for each country, and then extend existing excise systems to impose a tax oncarbon consumption that achieves the emissions target. An international trading scheme
is simply too complex, too expensive because of the new infrastructure required to handle
emission permits, and too risky because of inevitable weaknesses in emissions markets.
2. Tseming Yang concluded that In spite of the Bush Administration's rejection of the
1997 Kyoto Protocol, states and private organizations have made efforts to curb
greenhouse gas emissions independent of the federal government. Among these initiative
are cap and trade programs designed to lower the cost of reducing carbon emissions.
Among the best known cap and trade programs are the Chicago Climate Exchange
(CCX), a private trading scheme, and the New England Regional Greenhouse Gas
Initiative (RGGI), a recently created multi-state government-sponsored trading
arrangement that is still in the organizational set-up stage. Both of these programs follow
in the footsteps of the national cap and trade sulfur dioxide trading program created by
1990 Clean Air Act Amendments. Unlike the sulfur dioxide program, however, the
federal government is not involved in the enforcement of carbon emission limits in either
the CCX or the RGGI. Hence, compliance with program-wide carbon emissions caps will
depend on the enforcement efforts of the CCX and RGGI. This essay explores some of
the challenges of emissions cap enforcement posed by the structure of the two programs.
remaining permits increases, and more facility owners have to switch to cleaner
production methods. How well does it work in practice.
6. Michelle Labbe, concluded that: The idea of carbon credits is supposed to reduce
global carbon emissions. When carbon credits were first introduced, many people saw
them as a win-win situation. Under the carbon credit system, personal accountability was
taken out of the carbon footprint equation. Instead of businesses working to reduce their
own carbon emissions, they could pay another business to reduce their emissions. But the
world is learning that the carbon credit schemes may not be such a positive idea, leading
only to complex and dubious credit-trading schemes that have little positive impact on
reducing global carbon emissions.
Discourages Long-Term Solutions
The ability to trade carbon credits isn't conducive to coming up with long-term solutions
to reducing carbon emissions. Any actions taken now to reduce emissions may take a
long time to have a noticeable effect. Current solutions will impact emissions 10, 20 or
50 years into the future. This means that if a business trades money to gain more carbon
credits, that business will be able to maintain or even increase its level of carbon
emissions, while the anticipated reduction that is supposed to offset its emissions may beyears in coming. Under this scheme, far from reducing carbon emissions, the system of
carbon credits can lead to an overall increase in carbon emissions, speeding rather than
slowing global warming and depleting fossil fuel reserves further.
Volatile Trading Market
The market for trading carbon credits is also a volatile one. The European Union's
carbon-trading scheme issued so many permits between 2005 and 2007 that the market
was flooded, with the result that carbon prices bottomed out. This removed the incentive
for companies to trade their credits.
7. Maxwell Payne concludes that selling carbon credits to large companies that produce
a large volume of pollution can be a lucrative way for some smaller companies to earn
carbon dioxide can purchase carbon credits to offset their emissions. Individuals who
own forests or agricultural land can sell credits equal to the carbon reduction they areable to produce on their land.
9. Traqqer concludes that: Understand Carbon Trading There's a lot of talk these days
of global warming and the consequences. The concerns stem from the release of
greenhouse gases into the atmosphere. To help combat these, nations are starting to use
carbon trading to reduce emissions.
First, you need to understand how the stock market works. A company sells stocks toinvestors who then own a piece of that company. When the value of the company
increases, the stock shares increase in value. If the stocks are sold under these conditions,
you will make a net profit (difference of purchase price from the selling price).
Carbon emission reduction (CER) certificates can be earned through documented
reductions in emissions through some action. For example, a CER can be earned by
implementing a methane (CH4) capture equipment at pig farm (i.e., capture CH4
emissions from pig manure ponds). Once these CER certificates are earned, they can be
sold to various companies who cannot reduce their carbon emissions. Each CER will
allow a company to emit greenhouse gases by a certain amount. Similar to stocks, CER
certificates can also be sold on a carbon exchange market. Indeed, they can be bought and
sold when the prices rise in order to make a profit.
by the decision of the Commission in the Danish CO2 emissions trading scheme. The
Commission characterized grandfathering as state aid, but nevertheless exempted it by
using not only legal and economic, but also political arguments.
13. Eric R. W. Knight concludes that the European Union Emissions Trading Scheme
(EU ETS) is the world’s first regional carbon trading market. Its objective is to link
European countries around a common price for carbon as a step towards helping the
global economy transition to a low-carbon production base. This article is one of the first
quantitative econometric attempts to understand how a carbon price operates across
different economies. We find that the economic impact of a carbon price varies
depending on the underlying energy market structure where the carbon price is imposed.
This impact is much stronger than institutional differences associated with the volume of free carbon allowances and the carbon intensity of energy technologies.
By examining the role of underlying energy market structures on the role of carbon
pricing, this paper contributes to an emerging academic literature on the economic
geography of carbon markets. This is relevant to governments around the world which
are considering a carbon price in economies with unique energy market legacies.
14.Emilie Alberola ,Julien Chevallier ,Benoît Chèze concludes that the impact of
industrial production for sectors covered by the EU Emissions Trading Scheme (EU ETS)
on emissions allowance spot prices during Phase I (2005-2007). Using sector production
indices and CO2 emissions compliance positions defined by a ratio of allowance
allocation relative to baseline emissions, we show that the effect of industrial activity on
EU carbon price changes shall be analyzed in conjunction with production peaks and
compliance net short/long positions at the sector level. The results extend previous
literature by showing that carbon price changes react not only to energy prices forecast
errors and extreme temperatures events, but also to industrial production in three sectors
covered by the EU ETS: combustion, paper and iron.
15.McKinsey & Company at all (2007) worked to develop a detailed, consistent fact
base estimating costs & potential of different options to reduce or prevent GHG
emissions within the US over a 25 year period. The team analyzed more than 250 options