Carbon Credits: An Emissions Trading Market Created to Reduce Global Warming
As global economies grow, use more natural resources, and emit more Carbon Dioxide (CO2), more solutions will be needed to reduce global warming. The financial markets provide one unique way of limiting CO2 emissions through the creation of a carbon credit market. Each carbon credit represents one tonne of C02. The carbon credit market creates a monetary value for carbon credits and allows the credits to be traded.
Background and the Kyoto Protocol
The carbon credit market was a result of the Kyoto Protocol. The Kyoto Protocol created legally binding emission targets for developing nations. To meet these targets, nations must limit C02 emissions. This can be accomplished by either reducing emissions or by absorbing emissions through processes such as tree-planting and sequestration. Nations limit emissions by establishing quotas on the amount of emissions businesses can produce.
The Carbon Credit Exchange Process
If a business has greater emissions then permitted by the quota it must purchase carbon credits. If a business emits less then permitted by the quota, the business may sell the remaining carbon credits. Since each carbon credit represents one tonne of C02, the exchange of carbon credits theoretically results in no emissions above the specified target level. Carbon credits are either exchanged between businesses directly or through large exchanges, such as the European Climate Exchange (ECX) and the Chicago Climate Exchange (CCX).
Carbon Credit Trading Emission Reduction Advantages
The ability to trade carbon credits provides greater flexibility for businesses and countries. Trading allows business that have high expected emission reduction costs to purchase carbon credits from businesses that have low emission reduction costs. This reduces the quota’s impact on individual businesses.
The same flexibility benefits exists between nations. The cost of reducing emissions is greater for developed countries with strict environmental regulation and lower for developing nations with limited regulation. The developing nation can implement less expensive emission reduction projects, and sell carbon credits to the developed nations. The same amount of C02 emissions is being theoretically reduced, but the location of this reduction is shifted to the lower cost area.
The creation of a monetary value for C02 emissions creates an incentive to reduce emissions. The carbon credit market establishes a value for polluting and businesses must view this as another business expense. If global emissions continue to rise, the price of carbon credits should also increase, generating further incentive for businesses to reduce emissions.
Carbon Credit Market Limitations
The central limitation of the carbon credit market results from limited verification of C02 reduction projects and the true effectiveness of these projects. Limited verification makes it difficult for companies to actually assess if C02 was reduced by a specific project. Also, some projects may more effectively reduce C02 emissions than others. A Financial times investigation found these problems with the carbon credit market.
“Widespread instances of people and organisations buying worthless credits that do not yield any reductions in carbon emissions. Industrial companies profiting from doing very little - or from gaining carbon credits on the basis of efficiency gains from which they have already benefited substantially. Brokers providing services of questionable or no value. A shortage of verification, making it difficult for buyers to assess the true value of carbon credits. Companies and individuals being charged over the odds for the private purchase of European Union carbon permits that have plummeted in value because they do not result in emissions cuts.”
Purchasing Carbon Credits
Numerous sites online, provide methods for individuals and business to purchase carbon credits to offset emissions from activities such as, driving, flying, and home or office climate control. For example, to offset emissions for a 29-40 mpg car for one year, carbonfund.org charges $20. These prices can vary considerably between companies. The price can also be more expensive than the exchange price of the equivalent amount of carbon credits needed to offset the emissions because of small company volumes, administrative expenses, exchange membership expenses, and other costs.
Current Carbon Credit Prices
Below is a chart from the Chicago Climate Exchange. The chart depicts prices of the CCX Carbon Financial Instrument (CFI) since the trading inception date.
Conclusion
Carbon credit trading is an innovative method of controlling emissions using the free market. The system has limitations, and is not a perfect method of reducing global warming, but carbon credit trading provides a great platform for efficient emission and global warming reduction.
Related Sites:
http://www.carbonplanet.com/home/carbopedia.php
http://www.ft.com/cms/s/48e334ce-f355-11db-9845-000b5df10621.html
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