To people outside the green industry, carbon credits and carbon markets are probably one of the most mysterious topics concerning environmental sustainability. They would likely be quite surprised to discover that trading carbon permits and offsets for a price is a core solution to addressing climate change. This is despite the fact the term “cap and trade” has entered the vernacular.
Originally presented as a primary pillar of the Kyoto Protocol, carbon credits led to the development of a commodity-type market where capped credits can be traded. One carbon credit equates to one ton of carbon dioxide emissions, and the ultimate goal of the Kyoto Protocol carbon trading idea was to encourage countries to maintain a cap on carbon emissions and encourage voluntary reductions in emissions through the trading of carbon credits that have financial value.
In a cap and trade scheme, governments establish a legal limit on the amount of emissions of polluting entities and set a fixed number of carbon permits. A polluter with unused credits can trade them with another polluter that needs additional permits to avoid exceeding legal limits. The capped entities include industrialized countries participating in the Kyoto Protocol, other countries that have joined the effort outside the Kyoto Protocol, and particular companies in regional emissions trading schemes like that established by the European Union. The Intergovernmental Panel on Climate Change (IPCC) recommended that greenhouse gas concentrations reach peak levels by 2015 and then begin a process whereby emissions would be reduced by 85 percent by 2050.
Scheming to Cap Carbon Emissions
Naturally, to achieve this kind of goal requires looking at every industry that produces carbon emissions or can contribute to carbon emission reductions. They include construction, energy production, power grids, manufacturing, transportation and so on. Originally, the Kyoto Protocol set a cap for a collective group of industrialized countries of 95 percent of carbon emissions produced before the cap was set. To promote staying within the emissions targets, permits are issued to energy-intensive industries and businesses.
The trading of permits and offset credits takes place as over-the-counter (OTC) transaction or on exchanges. Carbon offsets represent a reduction in carbon dioxide emissions to offset emissions somewhere else. Gaining access to the carbon offsets and permits is made possible by investment funds and the Carbon Trade Exchange. In 2011, the voluntary OTC market traded shares for wind, forestation projects, landfill methane, biomass, clean cookstoves, solar, fuel switching, hydro, coal mine, livestock methane, wastewater methane, and some others. Voluntary market value for transaction was over $574 million.
Carbon capping and trading has been controversial since its introduction. That is one reason the U.S. has not ratified the Kyoto Protocol. Instead, the U.S. created various regional carbon trading protocols like the the Acid Rain Program. The European Emissions Trading System (EU ETS) is the largest international system for carbon trading. It impacts over 11,000 industrial plants and power stations in 31 countries and a some airlines. The 31 countries include all 28 European Union countries plus Iceland, Norway, and Liechtenstein. There are other countries like Australia that manage carbon credits also.
Love or Hate Relationship?
Despite being controversial, cap and trade, carbon permits, and carbon offsets represent efforts to lower carbon emissions, which are produced from numerous sources. Therefore, the principles apply to any human activity that increases the carbon footprint. As we all recognize, the type of cars we drive, the trees we cut down, the energy systems installed in buildings, and the way we produce manufactured goods influence carbon emissions. Love them or hate them, carbon credits make perfect sense in theory.
Carbon emissions and their relationship to global warming and climate changes are at the heart of carbon credits. To help develop a better understanding of carbon credits and the related market activity, Green Building Research Institute is offering a class to review the concepts and current status of carbon credits. The class, titled The Legacy of Carbon Credits: A-Z, is a no-holds barred course starting May 14, 2014 that will unmask the good, the bad, and the ugly of carbon credits.
Do you support carbon trading as a viable means of reducing carbon emissions? Would you share some reasons for your opinion?
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