Carbon emission trading
Encyclopedia
Carbon emissions trading is a form of emissions trading
that specifically targets carbon dioxide
(calculated in tonnes of carbon dioxide equivalent
or tCO2e) and it currently constitutes the bulk of emissions trading.
This form of permit trading is a common method countries utilize in order to meet their obligations specified by the Kyoto Protocol
; namely the reduction of carbon emissions in an attempt to reduce (mitigate) future climate change
.
(Goldemberg et al.., 1996, p. 29).
is one where emitters of greenhouse gas
es (GHGs) do not face the full cost implications of their actions (IMF, 2008, p. 6). There are costs that emitters do face, e.g., the costs of the fuel being used, but there are other costs that are not necessarily included in the price of a good or service. These other costs are called external costs (Halsnæs et al.., 2007). They are "external" because they are costs that the emitter does not face. External costs may affect the welfare
of others. In the case of climate change, GHG emissions affect the welfare of people living in the future, as well as affecting the natural environment (Toth et al., 2001). These external costs can be estimated and converted in a common (monetary) unit. The argument for doing this is that these external costs can then be added to the private costs that the emitter faces. In doing this, the emitter faces the full (social
) costs of their actions (IMF, 2008, p. 9).
to mean fairness) of a particular climate policy, e.g., how to share the burden of costs for mitigating future climate change (Toth et al., 2001). Nor do economists have any professional expertise in making ethical decisions, e.g., over the value assigned to the welfare of future generations (Arrow et al.., 1996, p. 130). Typically all the impacts of policy, both the costs and benefits, are added together (aggregation
), with different impacts on different individuals assigned particular "weightings," i.e., relative levels of importance. These valuations are decided by the economist doing the study. Valuations can be difficult since not all goods have a market price.
There are methods to infer prices for "non-market
" goods and services. However, these valuations can be controversial, e.g., valuations of human health impacts, or ecosystem
s (Smith et al.., 2001). There is also controversy over how potentially positive climate impacts, e.g., tourism
in particular regions benefiting from climate change, offset negative impacts in other regions, e.g., reduced food production (Smith et al.., 2001). The main advantage of economic analysis in this area is that it allows a comprehensive and consistent treatment of climate change impacts. It also allows the benefits of climate change policy decisions to be compared against other possible environmental policies.
(referred to by Toth et al.., 2001; and Helm, 2005, p. 4) argued that social costs could be accounted for by negotiating property rights according to a particular objective. Coase's model assumes perfectly operating market
s and equal bargaining power
among those arguing for property rights. For climate change, the property rights are for emissions (permits or quotas). However, it should be noted that other factors affect the climate other than just emissions, e.g., the ocean, forests, etc. (Goldemberg et al.., 1996, pp. 28–29). In Coase's model, efficiency, i.e., achieving a given reduction in emissions at lowest cost, is promoted by the market system. This can also be looked at from the perspective of having the greatest flexibility to reduce emissions. Flexibility is desirable because the marginal
costs, that is to say, the incremental costs of reducing emissions, varies among countries. Emissions trading allows emission reductions to be first made in locations where the marginal costs of abatement are lowest (Bashmakov et al.., 2001). Over time, efficiency can also be promoted by allowing "banking" of permits (Goldemberg et al.., 1996, p. 30). This allows polluters to reduce emissions at a time when it is most efficient to do so.
es should be preferred to carbon trading (Carbon Trust, 2009). Counter-arguments to this are usually based on the possible preference that politicians may have for emissions trading compared with taxes (Bashmakov et al.., 2001). One of these is that emission permits can be freely distributed to polluting industries, rather than the revenues going to the government. In comparison, industries may successfully lobby to exempt themselves from a carbon tax. It is therefore argued that with emissions trading, polluters have an incentive to cut emissions, but if they are exempted from a carbon tax, they have no incentive to cut emissions (Smith, 2008, pp. 56–57). On the other hand, freely distributing emission permits could potentially lead to corrupt behaviour (World Bank, 2010, p. 268).
A pure carbon tax fixes the price of carbon, but allows the amount of carbon emissions to vary; and a pure carbon cap places a limit on carbon emissions, letting the market price of tradable carbon allowances vary. Proponents argue that a carbon tax is more easy and simple to enforce on a broad-base scale than cap-and-trade programs. The simplicity and immediacy of a carbon tax has been proven effective in British Columbia, Canada - enacted and implemented in five months. Taxing can provide the right incentives for polluters, inventors, and engineers to develop cleaner technologies, in addition to creating revenue for the government.
Supporters of carbon cap-and-trade systems believes it sets legal limits for emissions reductions, unlike with carbon taxes . With a tax, there can be estimates of reduction in carbon emissions, which may not be sufficient to change the course of climate change. A declining cap gives allowance for firm reduction targets and a system for measuring when targets are met. It also allows for flexibility, unlike rigid taxes.
age firms, can allow for better management of risk
in the system, e.g., to variations in permit prices (Bashmakov et al.., 2001). It may also improve the efficiency of system. According to Bashmakov et al.. (2001), regulation of these other entities may be necessary, as is done in other financial market
s, e.g., to prevent abuses of the system, such as insider trading
.
s that can exist in emissions trading. Allocating permits on the basis of past emissions ("grandfathering") can result in firms having an incentive to maintain emissions. For example, a firm that reduced its emissions would receive fewer permits in the future (IMF, 2008, pp. 25–26). This problem can also be criticized on ethical grounds, since the polluter is being paid to reduce emissions (Goldemberg et al.., 1996, p. 38). On the other hand, a permit system where permits are auctioned rather than given away, provides the government with revenues. These revenues might be used to improve the efficiency of overall climate policy, e.g., by funding reductions in distortionary taxes (Fisher et al.., 1996, p. 417).
In Coase's model of social costs, either choice (grandfathering or auctioning) leads to efficiency. In reality, grandfathering subsidizes polluters, meaning that polluting industries may be kept in business longer than would otherwise occur. Grandfathering may also reduce the rate of technological improvement towards less polluting technologies (Fisher et al.., 1996, p. 417).
The economist William Nordhaus argues that allocations cost the economy as they cause the under utilisation an efficient form of taxation. Nordhaus points out that normal income, goods or service taxes distort efficient investment and consumption, so by using pollution taxes to generate revenue an emissions scheme can increase the efficiency of the economy.
Form of allocation
The economist Ross Garnaut
states that permits allocated to existing emitters by 'grandfathering' are not 'free'. As the permits are scarce they have value and the benefit of that value is acquired in full by the emitter. The cost is imposed elsewhere in the economy, typically on consumers who cannot pass on the costs.
“It is important that we stop thinking in terms of payments to Australian firms in order to compensate them for the effects of the domestic emissions trading scheme. There is no basis for compensation arising from the loss of profits or asset values as a result of this new policy. The rationale for payments to trade-exposed, emissions-intensive industries is different and sound. It is to avoid the economic and environmental costs of having firms in these industries contracting more than, and failing to expand as much as, they would in a world in which all countries were applying carbon constraints involving similar costs to ours.”
Transfers and acquisitions of these units are to be tracked and recorded through the registry systems under the Kyoto Protocol.
The increasing costs of permits have had the effect of increasing costs of carbon emitting fuels and activities. Based on a survey of 12 European countries, it was concluded that an increase in carbon and fuel prices of approximately ten percent would result in a short-run increase in electrical power prices of roughly eight percent. This would suggest that a lowering cap on carbon emissions will likely lead to an increase in the costs of alternative power sources. Whereas a sudden lowering of a carbon emission cap may prove detrimental to economies, a gradual lowering of the cap may risk future environmental damage via global warming.
In 2010 Chicago Climate Exchange (CCX) has ceased its trading of carbon emissions.
With the creation of a market for mandatory trading of carbon dioxide emissions within the Kyoto Protocol, the London financial marketplace
has established itself as the center of the carbon finance market, and is expected to have grown into a market valued at $60 billion in 2007. The voluntary offset market, by comparison, is projected to grow to about $4bn by 2010.
Twenty three multinational corporation
s came together in the G8 Climate Change Roundtable
, a business group formed at the January 2005 World Economic Forum
. The group included Ford
, Toyota, British Airways
, BP
and Unilever
. On 9 June 2005, the Group published a statement stating that there was a need to act on climate change and stressing the importance of market-based solutions. It called on governments to establish "clear, transparent, and consistent price signals" through "creation of a long-term policy framework" that would include all major producers of greenhouse gases. By December 2007, this had grown to encompass 150 global businesses.
Business in the UK have come out strongly in support of emissions trading as a key tool to mitigate climate change, supported by Green NGOs.
The British organization "Climakind" accepts donations and uses them to buy and cancel European Allowances, the carbon credits traded in the European Union Emission Trading System. It is argued that this removes the credits from the carbon market so they cannot be used to allow the emission of carbon and that this reduces the 'cap' on emissions by reducing the number of credits available to emitters.
The British organisation Sandbag
promotes cancelling carbon credits in order to lower emissions trading caps. As of August 2010, Sandbag states that it has cancelled carbon credits equivalent to 2145 tonnes of .
British activist Merrick Godhaven has criticised Sandbag's approach of voluntarily cancelling carbon credits because it would require millions of pounds to be effective and because it signals acceptance of carbon trading, a system designed by polluters. Godhaven considers carbon trading is a flawed response to reducing emissions for several reasons. The caps on emissions are set by industry lobbying, not by science. It is unjust as it seeks out the lowest cost emissions reductions, usually of poorly verified offsets in less developed countries. And the free allocation of permits to EU power and steel companies resulted in windfall profits.
, where rich countries maintain their levels of consumption while getting credit for carbon savings in inefficient industrial projects (Liverman, 2008, p. 16). Nations that have fewer financial resources may find that they cannot afford the permits necessary for developing an industrial infrastructure, thus inhibiting these countries economic development. Other criticisms include the questionable level of sustainable development
promoted by the Kyoto Protocol's Clean Development Mechanism
.
Another criticism is of non-existent emission reductions produced in the Kyoto Protocol due to the surplus ("hot air") of allowances that some countries have. For example, Russia has a surplus of allowances due to its economic collapse following the end of the Soviet Union (Liverman, 2008, p. 13). Other countries could buy these allowances from Russia, but this would not reduce emissions. Rather, it would simply be a redistribution of emissions allowances. In practice, Kyoto Parties have as yet chosen not to buy these surplus allowances (PBL, 2009)..
In China some companies started artificial production of greenhouse gases with sole purpose of their recycling and gaining carbon credits. Similar practices happened in India. Earned credit were then sold to companies in US and Europe.
Critics of carbon trading, such as Carbon Trade Watch
, argue that it places disproportionate emphasis on individual lifestyles and carbon footprints, distracting attention from the wider, systemic changes and collective political action that needs to be taken to tackle climate change. Groups such as the Corner House
have argued that the market will choose the easiest means to save a given quantity of carbon in the short term, which may be different to the pathway required to obtain sustained and sizable reductions over a longer period, and so a market-led approach is likely to reinforce technological lock-in. For instance, small cuts may often be achieved cheaply through investment in making a technology more efficient, where larger cuts would require scrapping the technology and using a different one. They also argue that emissions trading is undermining alternative approaches to pollution control with which it does not combine well, and so the overall effect it is having is to actually stall significant change to less polluting technologies. In September 2010, campaigning group FERN
released "Trading Carbon: How it works and why it is controversial" which compiles many of the arguments against carbon trading.
The Financial Times
published an article about cap-and-trade systems which argued that "Carbon markets create a muddle" and "...leave much room for unverifiable manipulation". Lohmann (2009) pointed out that emissions trading schemes create new uncertainties and risks, which can be commodified by means of derivatives
, thereby creating a new speculative
market.
Recent proposals for alternative schemes to avoid the problems of cap-and-trade schemes include Cap and Share
, which was being actively considered by the Irish Parliament in May 2008, and the Sky Trust schemes. These schemes state that cap-and-trade or cap-and-tax schemes inherently impact the poor and those in rural areas, who have less choice in energy consumption options.
to take place . The principal point here is that financial system innovations (outside banking) open up the possibility for unregulated (non-banking) transactions to take place in relativity unsupervised markets. The principle being that poorly supervised markets open up the possibility of structuring to take place.
Emissions trading
Emissions trading is a market-based approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants....
that specifically targets carbon dioxide
Carbon dioxide
Carbon dioxide is a naturally occurring chemical compound composed of two oxygen atoms covalently bonded to a single carbon atom...
(calculated in tonnes of carbon dioxide equivalent
Carbon dioxide equivalent
Carbon dioxide equivalent and Equivalent carbon dioxide are two related but distinct measures for describing how much global warming a given type and amount of greenhouse gas may cause, using the functionally equivalent amount or concentration of carbon dioxide as the reference.- Global warming...
or tCO2e) and it currently constitutes the bulk of emissions trading.
This form of permit trading is a common method countries utilize in order to meet their obligations specified by the Kyoto Protocol
Kyoto Protocol
The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change , aimed at fighting global warming...
; namely the reduction of carbon emissions in an attempt to reduce (mitigate) future climate change
Climate change
Climate change is a significant and lasting change in the statistical distribution of weather patterns over periods ranging from decades to millions of years. It may be a change in average weather conditions or the distribution of events around that average...
.
Economics
Emissions trading works by setting a quantitative limit on the emissions produced by emitters. The economic basis for emissions trading is linked to the concept of property rightsProperty rights (economics)
A property right is the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals. All economic goods have a property rights attribute...
(Goldemberg et al.., 1996, p. 29).
Costs and valuation
The problem of climate changeClimate change
Climate change is a significant and lasting change in the statistical distribution of weather patterns over periods ranging from decades to millions of years. It may be a change in average weather conditions or the distribution of events around that average...
is one where emitters of greenhouse gas
Greenhouse gas
A greenhouse gas is a gas in an atmosphere that absorbs and emits radiation within the thermal infrared range. This process is the fundamental cause of the greenhouse effect. The primary greenhouse gases in the Earth's atmosphere are water vapor, carbon dioxide, methane, nitrous oxide, and ozone...
es (GHGs) do not face the full cost implications of their actions (IMF, 2008, p. 6). There are costs that emitters do face, e.g., the costs of the fuel being used, but there are other costs that are not necessarily included in the price of a good or service. These other costs are called external costs (Halsnæs et al.., 2007). They are "external" because they are costs that the emitter does not face. External costs may affect the welfare
Welfare economics
Welfare economics is a branch of economics that uses microeconomic techniques to evaluate economic well-being, especially relative to competitive general equilibrium within an economy as to economic efficiency and the resulting income distribution associated with it...
of others. In the case of climate change, GHG emissions affect the welfare of people living in the future, as well as affecting the natural environment (Toth et al., 2001). These external costs can be estimated and converted in a common (monetary) unit. The argument for doing this is that these external costs can then be added to the private costs that the emitter faces. In doing this, the emitter faces the full (social
Social cost
Social cost, in economics, is generally defined in opposition to "private cost". In economics, theorists model individual decision-making as measurement of costs and benefits...
) costs of their actions (IMF, 2008, p. 9).
Ethics and fairness
The way of dealing with climate change has particular ethical issues and other issues related to the fairness of the problem. To actually calculate social costs requires value judgements about the value of future climate impacts (Smith et al.., 2001). There is no consensus among economists over how to value the fairness (economists use the term equityEquity (economics)
Equity is the concept or idea of fairness in economics, particularly as to taxation or welfare economics. More specifically it may refer to equal life chances regardless of identity, to provide all citizens with a basic minimum of income/goods/services or to increase funds and commitment for...
to mean fairness) of a particular climate policy, e.g., how to share the burden of costs for mitigating future climate change (Toth et al., 2001). Nor do economists have any professional expertise in making ethical decisions, e.g., over the value assigned to the welfare of future generations (Arrow et al.., 1996, p. 130). Typically all the impacts of policy, both the costs and benefits, are added together (aggregation
Aggregate data
In statistics, aggregate data describes data combined from several measurements.In economics, aggregate data or data aggregates describes high-level data that is composed of a multitude or combination of other more individual data....
), with different impacts on different individuals assigned particular "weightings," i.e., relative levels of importance. These valuations are decided by the economist doing the study. Valuations can be difficult since not all goods have a market price.
There are methods to infer prices for "non-market
Nonmarket
In economics, nonmarket forces are those acting on economic actors from outside the market system. They include internal and external organizing and correcting factors that provide order to market and other types of societal institutions and organizations – economic, political, social and cultural...
" goods and services. However, these valuations can be controversial, e.g., valuations of human health impacts, or ecosystem
Ecosystem
An ecosystem is a biological environment consisting of all the organisms living in a particular area, as well as all the nonliving , physical components of the environment with which the organisms interact, such as air, soil, water and sunlight....
s (Smith et al.., 2001). There is also controversy over how potentially positive climate impacts, e.g., tourism
Tourism
Tourism is travel for recreational, leisure or business purposes. The World Tourism Organization defines tourists as people "traveling to and staying in places outside their usual environment for not more than one consecutive year for leisure, business and other purposes".Tourism has become a...
in particular regions benefiting from climate change, offset negative impacts in other regions, e.g., reduced food production (Smith et al.., 2001). The main advantage of economic analysis in this area is that it allows a comprehensive and consistent treatment of climate change impacts. It also allows the benefits of climate change policy decisions to be compared against other possible environmental policies.
Coase
Coase (1960)The Problem of Social Cost
The Problem of Social Cost by Ronald Coase is an article dealing with economic problem of externalities. It draws from a number of English legal cases and statutes to illustrate Coase's belief that legal rules are only justified by reference to a cost benefit analysis, and that nuisances that are...
(referred to by Toth et al.., 2001; and Helm, 2005, p. 4) argued that social costs could be accounted for by negotiating property rights according to a particular objective. Coase's model assumes perfectly operating market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
s and equal bargaining power
Bargaining power
Bargaining power is a concept related to the relative abilities of parties in a situation to exert influence over each other. If both parties are on an equal footing in a debate, then they will have equal bargaining power, such as in a perfectly competitive market, or between an evenly matched...
among those arguing for property rights. For climate change, the property rights are for emissions (permits or quotas). However, it should be noted that other factors affect the climate other than just emissions, e.g., the ocean, forests, etc. (Goldemberg et al.., 1996, pp. 28–29). In Coase's model, efficiency, i.e., achieving a given reduction in emissions at lowest cost, is promoted by the market system. This can also be looked at from the perspective of having the greatest flexibility to reduce emissions. Flexibility is desirable because the marginal
Margin (economics)
In economics, a margin is a set of constraints conceptualised as a border. A marginal change is the change associated with a relaxation or tightening of constraints — either change of the constraints, or a change in response to this change of the constraints.- Extensive and intensive margins...
costs, that is to say, the incremental costs of reducing emissions, varies among countries. Emissions trading allows emission reductions to be first made in locations where the marginal costs of abatement are lowest (Bashmakov et al.., 2001). Over time, efficiency can also be promoted by allowing "banking" of permits (Goldemberg et al.., 1996, p. 30). This allows polluters to reduce emissions at a time when it is most efficient to do so.
Equity
One of the advantages of Coase's model is that it suggests that fairness (equity) can be addressed in the distribution of property rights, and that regardless of how these property rights are assigned, the market will produce the most efficient outcome (Goldemberg et al.., 1996, p. 29). In reality, markets are not perfect, and it is therefore possible that a trade off will occur between equity and efficiency (Halsnæs et al.., 2007).Taxes versus caps
A large number of papers in the economics literature suggest that carbon taxCarbon tax
A carbon tax is an environmental tax levied on the carbon content of fuels. It is a form of carbon pricing. Carbon is present in every hydrocarbon fuel and is released as carbon dioxide when they are burnt. In contrast, non-combustion energy sources—wind, sunlight, hydropower, and nuclear—do not...
es should be preferred to carbon trading (Carbon Trust, 2009). Counter-arguments to this are usually based on the possible preference that politicians may have for emissions trading compared with taxes (Bashmakov et al.., 2001). One of these is that emission permits can be freely distributed to polluting industries, rather than the revenues going to the government. In comparison, industries may successfully lobby to exempt themselves from a carbon tax. It is therefore argued that with emissions trading, polluters have an incentive to cut emissions, but if they are exempted from a carbon tax, they have no incentive to cut emissions (Smith, 2008, pp. 56–57). On the other hand, freely distributing emission permits could potentially lead to corrupt behaviour (World Bank, 2010, p. 268).
A pure carbon tax fixes the price of carbon, but allows the amount of carbon emissions to vary; and a pure carbon cap places a limit on carbon emissions, letting the market price of tradable carbon allowances vary. Proponents argue that a carbon tax is more easy and simple to enforce on a broad-base scale than cap-and-trade programs. The simplicity and immediacy of a carbon tax has been proven effective in British Columbia, Canada - enacted and implemented in five months. Taxing can provide the right incentives for polluters, inventors, and engineers to develop cleaner technologies, in addition to creating revenue for the government.
Supporters of carbon cap-and-trade systems believes it sets legal limits for emissions reductions, unlike with carbon taxes . With a tax, there can be estimates of reduction in carbon emissions, which may not be sufficient to change the course of climate change. A declining cap gives allowance for firm reduction targets and a system for measuring when targets are met. It also allows for flexibility, unlike rigid taxes.
Trading
In an emissions trading system, permits may be traded by emitters who are liable to hold a sufficient number of permits in system. Some analysts argue that allowing others to participate in trading, e.g., private brokerBroker
A broker is a party that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal...
age firms, can allow for better management of risk
Risk management
Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...
in the system, e.g., to variations in permit prices (Bashmakov et al.., 2001). It may also improve the efficiency of system. According to Bashmakov et al.. (2001), regulation of these other entities may be necessary, as is done in other financial market
Financial market
In economics, a financial market is a mechanism that allows people and entities to buy and sell financial securities , commodities , and other fungible items of value at low transaction costs and at prices that reflect supply and demand.Both general markets and...
s, e.g., to prevent abuses of the system, such as insider trading
Insider trading
Insider trading is the trading of a corporation's stock or other securities by individuals with potential access to non-public information about the company...
.
Incentives and allocation
Emissions trading gives polluters an incentive to reduce their emissions. However, there are possible perverse incentivePerverse incentive
A perverse incentive is an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers. Perverse incentives are a type of unintended consequences.- Examples :...
s that can exist in emissions trading. Allocating permits on the basis of past emissions ("grandfathering") can result in firms having an incentive to maintain emissions. For example, a firm that reduced its emissions would receive fewer permits in the future (IMF, 2008, pp. 25–26). This problem can also be criticized on ethical grounds, since the polluter is being paid to reduce emissions (Goldemberg et al.., 1996, p. 38). On the other hand, a permit system where permits are auctioned rather than given away, provides the government with revenues. These revenues might be used to improve the efficiency of overall climate policy, e.g., by funding reductions in distortionary taxes (Fisher et al.., 1996, p. 417).
In Coase's model of social costs, either choice (grandfathering or auctioning) leads to efficiency. In reality, grandfathering subsidizes polluters, meaning that polluting industries may be kept in business longer than would otherwise occur. Grandfathering may also reduce the rate of technological improvement towards less polluting technologies (Fisher et al.., 1996, p. 417).
The economist William Nordhaus argues that allocations cost the economy as they cause the under utilisation an efficient form of taxation. Nordhaus points out that normal income, goods or service taxes distort efficient investment and consumption, so by using pollution taxes to generate revenue an emissions scheme can increase the efficiency of the economy.
Form of allocation
The economist Ross Garnaut
Ross Garnaut
Ross Gregory Garnaut AO is a Distinguished Professor of Economics at the Australian National University and both a Vice-Chancellor's Fellow and Professorial Fellow of Economics at The University of Melbourne....
states that permits allocated to existing emitters by 'grandfathering' are not 'free'. As the permits are scarce they have value and the benefit of that value is acquired in full by the emitter. The cost is imposed elsewhere in the economy, typically on consumers who cannot pass on the costs.
“It is important that we stop thinking in terms of payments to Australian firms in order to compensate them for the effects of the domestic emissions trading scheme. There is no basis for compensation arising from the loss of profits or asset values as a result of this new policy. The rationale for payments to trade-exposed, emissions-intensive industries is different and sound. It is to avoid the economic and environmental costs of having firms in these industries contracting more than, and failing to expand as much as, they would in a world in which all countries were applying carbon constraints involving similar costs to ours.”
Units
The units which may be transferred under Article 17 emissions trading, each equal to one metric tonne of emissions (in CO2-equivalent terms), may be in the form of:- An assigned amount unitAssigned amount unitsAn Assigned Amount Unit is a tradable 'Kyoto unit' or 'carbon credit' representing an allowance to emit greenhouse gases comprising one metric tonne of carbon dioxide equivalents calculated using their Global Warming Potential....
(AAU) issued by an Annex I Party on the basis of its assigned amount pursuant to Articles 3.7 and 3.8 of the Protocol. - A removal unit (RMU) issued by an Annex I Party on the basis of land use, land-use change and forestry (LULUCF) activities under Articles 3.3 and 3.4 of the Kyoto Protocol.
- An emission reduction unitEmission Reduction UnitThe Emission reduction unit is a trading unit under the Kyoto Protocol representing a reduction of greenhouse gases under the Joint Implementation mechanism, where it represents one tonne of equivalent reduced....
(ERUEruEru may refer to:* Eru , a K-Pop singer and son of trot Korean singer Tae Jin Ah.* Eru Ilúvatar, the Elvish name for God in J. R. R. Tolkien's Middle-earth legendarium...
) generated by a joint implementationJoint ImplementationJoint implementation is one of three flexibility mechanisms set forth in the Kyoto Protocol to help countries with binding greenhouse gas emissions targets meet their obligations. JI is set forth in Article 6 of the Kyoto Protocol...
project under Article 6 of the Kyoto ProtocolKyoto ProtocolThe Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change , aimed at fighting global warming...
. - A certified emission reductionCertified Emission ReductionCertified Emission Reductions are a type of emissions unit issued by the Clean Development Mechanism Executive Board for emission reductions achieved by CDM projects and verified by a DOE under the rules of the Kyoto Protocol...
(CERCerCer or CER may refer to:* Cer , a mountain in Serbia* Cer , Greek goddess of violent death, one of the Protogenoi* Canonical Encoding Rules, a set of ASN.1 encoding rules for formatting data in binary* Centre for European Reform...
) generated from a clean development mechanismClean Development MechanismThe Clean Development Mechanism is one of the "flexibility" mechanisms defined in the Kyoto Protocol . It is defined in Article 12 of the Protocol, and is intended to meet two objectives: to assist parties not included in Annex I in achieving sustainable development and in contributing to the...
project activity under Article 12 of the Kyoto Protocol.
Transfers and acquisitions of these units are to be tracked and recorded through the registry systems under the Kyoto Protocol.
Market trend
Carbon emissions trading has been steadily increasing in recent years. According to the World Bank's Carbon Finance Unit, 374 million metric tonnes of carbon dioxide equivalent (tCO2e) were exchanged through projects in 2005, a 240% increase relative to 2004 (110 mtCO2e) which was itself a 41% increase relative to 2003 (78 mtCO2e).The increasing costs of permits have had the effect of increasing costs of carbon emitting fuels and activities. Based on a survey of 12 European countries, it was concluded that an increase in carbon and fuel prices of approximately ten percent would result in a short-run increase in electrical power prices of roughly eight percent. This would suggest that a lowering cap on carbon emissions will likely lead to an increase in the costs of alternative power sources. Whereas a sudden lowering of a carbon emission cap may prove detrimental to economies, a gradual lowering of the cap may risk future environmental damage via global warming.
In 2010 Chicago Climate Exchange (CCX) has ceased its trading of carbon emissions.
Business reaction
Economist Craig Mellow wrote in May 2008: “The combination of global warming and growing environmental consciousness is creating a potentially huge market in the trading of pollution-emission credits."With the creation of a market for mandatory trading of carbon dioxide emissions within the Kyoto Protocol, the London financial marketplace
City of London
The City of London is a small area within Greater London, England. It is the historic core of London around which the modern conurbation grew and has held city status since time immemorial. The City’s boundaries have remained almost unchanged since the Middle Ages, and it is now only a tiny part of...
has established itself as the center of the carbon finance market, and is expected to have grown into a market valued at $60 billion in 2007. The voluntary offset market, by comparison, is projected to grow to about $4bn by 2010.
Twenty three multinational corporation
Multinational corporation
A multi national corporation or enterprise , is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation...
s came together in the G8 Climate Change Roundtable
G8 Climate Change Roundtable
The G8 Climate Change Roundtable was formed in January 2005 at the World Economic Forum in Davos. The first meeting was held in Gleneagles, Scotland, from 6–8 July 2005, to coincide with the 31st G8 summit....
, a business group formed at the January 2005 World Economic Forum
World Economic Forum
The World Economic Forum is a Swiss non-profit foundation, based in Cologny, Geneva, best known for its annual meeting in Davos, a mountain resort in Graubünden, in the eastern Alps region of Switzerland....
. The group included Ford
Ford Motor Company
Ford Motor Company is an American multinational automaker based in Dearborn, Michigan, a suburb of Detroit. The automaker was founded by Henry Ford and incorporated on June 16, 1903. In addition to the Ford and Lincoln brands, Ford also owns a small stake in Mazda in Japan and Aston Martin in the UK...
, Toyota, British Airways
British Airways
British Airways is the flag carrier airline of the United Kingdom, based in Waterside, near its main hub at London Heathrow Airport. British Airways is the largest airline in the UK based on fleet size, international flights and international destinations...
, BP
BP
BP p.l.c. is a global oil and gas company headquartered in London, United Kingdom. It is the third-largest energy company and fourth-largest company in the world measured by revenues and one of the six oil and gas "supermajors"...
and Unilever
Unilever
Unilever is a British-Dutch multinational corporation that owns many of the world's consumer product brands in foods, beverages, cleaning agents and personal care products....
. On 9 June 2005, the Group published a statement stating that there was a need to act on climate change and stressing the importance of market-based solutions. It called on governments to establish "clear, transparent, and consistent price signals" through "creation of a long-term policy framework" that would include all major producers of greenhouse gases. By December 2007, this had grown to encompass 150 global businesses.
Business in the UK have come out strongly in support of emissions trading as a key tool to mitigate climate change, supported by Green NGOs.
Voluntary surrender of units
There are examples of individuals and organisations purchasing tradable emission permits and 'retiring' (cancelling) them so they cannot be used by emitters to authorise their emissions. This makes the emissions 'cap' lower and therefore further reduces emissions. In 1992, the National Healthy Air License Exchange was established to pool donations for buying and retiring sulfur allowances under the USA sulfur allowance trading program.The British organization "Climakind" accepts donations and uses them to buy and cancel European Allowances, the carbon credits traded in the European Union Emission Trading System. It is argued that this removes the credits from the carbon market so they cannot be used to allow the emission of carbon and that this reduces the 'cap' on emissions by reducing the number of credits available to emitters.
The British organisation Sandbag
Sandbag (non-profit organisation)
Sandbag is a Community Interest Company, campaigning to increase public awareness of emissions trading. The organisation was announced in 2008 by Bryony Worthington and was the first member of The Guardian's Environment Network....
promotes cancelling carbon credits in order to lower emissions trading caps. As of August 2010, Sandbag states that it has cancelled carbon credits equivalent to 2145 tonnes of .
British activist Merrick Godhaven has criticised Sandbag's approach of voluntarily cancelling carbon credits because it would require millions of pounds to be effective and because it signals acceptance of carbon trading, a system designed by polluters. Godhaven considers carbon trading is a flawed response to reducing emissions for several reasons. The caps on emissions are set by industry lobbying, not by science. It is unjust as it seeks out the lowest cost emissions reductions, usually of poorly verified offsets in less developed countries. And the free allocation of permits to EU power and steel companies resulted in windfall profits.
Criticisms
One criticism of carbon trading is that it is a form of colonialismColonialism
Colonialism is the establishment, maintenance, acquisition and expansion of colonies in one territory by people from another territory. It is a process whereby the metropole claims sovereignty over the colony and the social structure, government, and economics of the colony are changed by...
, where rich countries maintain their levels of consumption while getting credit for carbon savings in inefficient industrial projects (Liverman, 2008, p. 16). Nations that have fewer financial resources may find that they cannot afford the permits necessary for developing an industrial infrastructure, thus inhibiting these countries economic development. Other criticisms include the questionable level of sustainable development
Sustainable development
Sustainable development is a pattern of resource use, that aims to meet human needs while preserving the environment so that these needs can be met not only in the present, but also for generations to come...
promoted by the Kyoto Protocol's Clean Development Mechanism
Clean Development Mechanism
The Clean Development Mechanism is one of the "flexibility" mechanisms defined in the Kyoto Protocol . It is defined in Article 12 of the Protocol, and is intended to meet two objectives: to assist parties not included in Annex I in achieving sustainable development and in contributing to the...
.
Another criticism is of non-existent emission reductions produced in the Kyoto Protocol due to the surplus ("hot air") of allowances that some countries have. For example, Russia has a surplus of allowances due to its economic collapse following the end of the Soviet Union (Liverman, 2008, p. 13). Other countries could buy these allowances from Russia, but this would not reduce emissions. Rather, it would simply be a redistribution of emissions allowances. In practice, Kyoto Parties have as yet chosen not to buy these surplus allowances (PBL, 2009)..
In China some companies started artificial production of greenhouse gases with sole purpose of their recycling and gaining carbon credits. Similar practices happened in India. Earned credit were then sold to companies in US and Europe.
Critics of carbon trading, such as Carbon Trade Watch
Carbon Trade Watch
Carbon Trade Watch is an independent research collective working on climate change and climate policy from a justice-based perspective. It was formerly part of the Amsterdam-based Transnational Institute....
, argue that it places disproportionate emphasis on individual lifestyles and carbon footprints, distracting attention from the wider, systemic changes and collective political action that needs to be taken to tackle climate change. Groups such as the Corner House
The Corner House (organisation)
The Corner House is a not for profit company limited by guarantee founded in 1997 in the United Kingdom. According to its website, it aims "to support democratic & community movements for environmental & social justice"...
have argued that the market will choose the easiest means to save a given quantity of carbon in the short term, which may be different to the pathway required to obtain sustained and sizable reductions over a longer period, and so a market-led approach is likely to reinforce technological lock-in. For instance, small cuts may often be achieved cheaply through investment in making a technology more efficient, where larger cuts would require scrapping the technology and using a different one. They also argue that emissions trading is undermining alternative approaches to pollution control with which it does not combine well, and so the overall effect it is having is to actually stall significant change to less polluting technologies. In September 2010, campaigning group FERN
FERN
FERN is a Dutch foundation created in 1995. It is an international non-governmental organization to keep track of the EU’s involvement in forests and to co-ordinate NGO activities at the European level...
released "Trading Carbon: How it works and why it is controversial" which compiles many of the arguments against carbon trading.
The Financial Times
Financial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....
published an article about cap-and-trade systems which argued that "Carbon markets create a muddle" and "...leave much room for unverifiable manipulation". Lohmann (2009) pointed out that emissions trading schemes create new uncertainties and risks, which can be commodified by means of derivatives
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
, thereby creating a new speculative
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
market.
Recent proposals for alternative schemes to avoid the problems of cap-and-trade schemes include Cap and Share
Cap and Share
Cap and Share was originally developed by Feasta and is a regulatory and economic framework for controlling the use of fossil fuels in relation to climate stabilisation...
, which was being actively considered by the Irish Parliament in May 2008, and the Sky Trust schemes. These schemes state that cap-and-trade or cap-and-tax schemes inherently impact the poor and those in rural areas, who have less choice in energy consumption options.
Structuring issues
Corporate and governmental Carbon emission trading schemes (a trading system devised by economists to reduce emissions, the goal being to reduce global warming) have been modified in ways that have been attributed to permitting money launderingMoney laundering
Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
to take place . The principal point here is that financial system innovations (outside banking) open up the possibility for unregulated (non-banking) transactions to take place in relativity unsupervised markets. The principle being that poorly supervised markets open up the possibility of structuring to take place.
See also
- Low carbon power generation
- New South Wales Greenhouse Gas Abatement SchemeNew South Wales Greenhouse Gas Abatement SchemeThe New South Wales Greenhouse Gas Abatement Scheme , which commenced on 1 January 2003, is a mandatory greenhouse gas emissions trading scheme that aims to lower greenhouse gas emissions to 7.27 tonnes of carbon dioxide per capita by the year 2007.-External links:*...
- Personal carbon tradingPersonal carbon tradingPersonal carbon trading is a general term referring to a number of proposed emissions trading schemes under which emissions credits are allocated to adult individuals on a equal per capita basis, within national carbon budgets. Individuals then surrender these credits when buying fuel or electricity...
External links
- "The Making of a Market-Minded Environmentalist", article by Fred KruppFred KruppFred Krupp is the president of Environmental Defense Fund, a United States-based nonprofit environmental advocacy group.Krupp is a graduate of Yale University with a law degree from the University of Michigan and has taught environmental law at both schools....
in Strategy+BusinessStrategy+Businessstrategy+business is a business and management magazine published by Booz & Company, and edited by Art Kleiner. Prior to the separation of Booz & Company and Booz Allen Hamilton in 2008, strategy+business was published by Booz Allen Hamilton...
(registration reqd) that articulates some of the reasoning and history behind emissions trading in CaliforniaCaliforniaCalifornia is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area... - The Stern Review on the economics of climate change - Chapters 14 and 15 have extensive discussions on emission trading schemes and carbon taxes
- Carbon Trading - How it works and why it fails, published November 2009 by Dag Hammarskjöld FoundationDag Hammarskjöld FoundationThe Dag Hammarskjöld Foundation was created in 1962 as Sweden’s national memorial to Dag Hammarskjöld, Secretary General of the United Nations from 1953 until his death in a plane crash on a mission to the Congo...
: A booklet on various Emissions Trading Schemes (CDM, REDD, ETS) with case studies from Indonesia, Brazil, Thailand and India. - Chandler: More Flexibility Needed for Effective Emissions Cap-and-Trade Policy Council on Foreign Relations
- Green Structured Products are likely to Proliferate piece by Edmund Parker and Nicole Purin, Mayer Brown, published in Financial News, 3 December 2007
- Arnaud Brohe: Carbon Markets, Earthscan