CARBON EMISSION TRADING
Carbon emission trading involves the trading of permits to emit carbon dioxide (and other greenhouse gases, calculated in tonnes of carbon dioxide equivalent, tCO2e). It is one of the ways countries can meet their obligations under the Kyoto Protocol to reduce carbon emissions and thereby mitigate global warming.
107 million metric tonnes of carbon dioxide equivalent (tCO2e) have been exchanged through projects in 2004, a 38% increase relative to 2003 (78 mtCO2e).
The world's only mandatory carbon trading program is the European Union Emissions Trading Scheme (or EUETS). Created in conjunction with the Kyoto Protocol, a 1997 international treaty that took effect in 2005, it caps the amount of carbon dioxide that can be emitted from large installations, such as power plants and factories, in the EU's 25 member countries. (AP)
Operation
A country (or group of countries) caps its carbon emissions at a certain level (this is known as cap and trade) and then issues permits to firms and industries that grant the firm the right to emit a stated amount of carbon dioxide over a time period. Firms are then free to trade these credits in a free market. Firms whose emissions exceed the amount of credits they possess will be heavily penalized. The idea behind carbon trading is that firms that can reduce their emissions at a low cost will do so and then sell their credits on to firms that are unable to easily reduce emissions. A shortage of credits will drive up the price of credits and make it more profitable for firms to engage in carbon reduction. In this way the desired carbon reductions are met at the lowest cost possible to society.
Business opinion
With the creation of a market for trading carbon dioxide emissions within the Kyoto Protocol, it is likely that London financial markets will be the centre for this potentially highly lucrative business; the New York and Chicago stock markets would like a share (which is unlikely as long as the US rejects Kyoto). The European Union's European Union Greenhouse Gas Emission Trading Scheme (EU ETS) began operations on 1 January 2005.
23 multinational corporations have come together in the G8 Climate Change Roundtable, a business group formed at the January 2005 World Economic Forum. The group includes Ford, Toyota, British Airways and BP. 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.
The European Union Emission Trading Scheme (EU ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world. Under the scheme, each participating country proposes a National Allocation Plan (NAP) including caps on greenhouse gas emissions for power plants and other large point sources. The NAP must subsequently be approved by the European Commission.
Allocation
Most allowances in all countries were given freely (known as grandfathering). This approach has been criticized as being less efficient than auctioning and providing too little incentive for installing clean, renewable energy
The inclusion of sinks
Currently, the EU does not allow CO2 credits under ETS to be obtained from sinks (e.g. reducing CO2 by planting trees). However, some governments and industry representatives lobby for their inclusion. The inclusion is currently opposed by NGO's as well as the EU commission itself, arguing that sinks are surrounded by too many scientific uncertainties over their permanence and that they have inferior long-term contribution to climate change compared to reducing emissions from industrial sources[