What is carbon trading?
Answers
Carbon trading is an approach used to control carbon dioxide (CO2) pollution by providing economic incentives for achieving emissions reductions. It is sometimes called cap and trade or carbon emissions trading.
Carbon trading is administered by a central authority such as a government or international organization which sets a limit or cap on the amount of CO2 that can be emitted. Companies or other groups are issued permits that require them to hold allowances (or credits) in order to emit an equivalent amount of CO2. The total amount of allowances and credits cannot exceed the cap, limiting total emissions to that level. Companies that need to increase their allowance must buy credits from those who pollute less. The transfer of allowances is referred to as a trade. The buyer therefore pays to pollute, while the seller is financially rewarded for reducing CO2 emissions. In theory, those that can easily reduce emissions most cheaply will do so.
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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.
Under Carbon trading, a country or a polluter having more emissions of carbon is able to purchase the right to emit more and the country or entity having fewer emissions sells the right to emit carbon to other countries or entities. The countries or polluting entities emitting more carbon thereby satisfy their carbon emission requirements, and the trading market results in the most cost-effective carbon reduction methods being exploited first. For any given expenditure on carbon reduction, the market mechanism will result in the greatest reduction.