The Carbon Market

Global Warming is the biggest threat to humanity. Melting glaciers, freak storms, Australian bushfire, rising temperature shows how quickly and drastically green house emissions (GHG) are changing our planet. Besides the rising price of energy, compel people to reduce the consumption and lower their personal shares of global emissions. But there is a developing framework of economic solutions to the problem. The world leaders have accepted carbon trading over its rival, carbon tax as a novel way to reduce the GHG emissions.

Carbon trading often referred as emissions trading. It is a market based tool to limit the greenhouse gas emissions. The carbon market mainly trades emissions under cap-and-trade schemes or with credits that pay for or offset GHG reductions. Under cap-and-trade schemes the governing body fixes a cap on allowable emissions and then distributes or auctions off emissions allowances that total the cap. Member firms that do not have enough allowances to cover their emissions must either make reductions or buy another firm’s spare. Members with extra allowances can sell them or bank them for future use. A successful cap-and-trade scheme relies on a strict but feasible cap that decreases emissions over time. A too high or low cap will not serve the purpose. The governing body stabilizes the high price of allowances by releasing additional credits. The price of allowances is usually a function of supply and demand. 

Credits are similar to carbon offsets and they are used in conjunction with cap-and-trade schemes. Firms that wishes to reduce below target may fund pre approved emissions reduction projects at other sites and also in other countries. Following points to be noted in this context:

•         A carbon market allows countries or industries to earn carbon credits for emission reductions they make in excess of what are required of them.

•         These credits can be traded to the highest bidder in exchange for money.

•         The buyers of carbon credits can show the emission reductions as their own and use them to meet their own emission reduction targets.

•         A carbon market already existed under the 1997 Kyoto Protocol but several countries walked out of the Kyoto Protocol and thus the demand for carbon credits had waned.

•         As a result, developing countries like India, China and Brazil had accumulated huge amounts of carbon credits. These credits are now in danger of getting redundant.

Thus carbon market can be a way for the reduction of green house emission to the atmosphere. It is thereby a feasible method for the protection of environment. But a plan is as good as its implementation. Therefore this should be taken into consideration by the environmentalist, scientist and other such person working for the protection and preservation of environment.

Dr. Sumitra Mohanty,

Coordinator, Research Documentation and Communication, PECUC