What is Carbon Trading?
Carbon trading, sometimes called emissions trading is a method to limit greenhouse gas emissions (GHG). A central authority (governmentalbody) sets a limit or a “cap” on the amount of a pollutant that can be emitted. This cap is allocated to companies in the form of emissions permits. If a company doesn’t have enough emissions permits, then they either have to reduce their emissions or purchase more permits. The total number of permits can’t exceed the cap. Firms that have spare credits or permits can either bank them or sell them to another company. This combination of a cap on emissions with the ability to sell or transfer credits to other companies is referred to as “cap and trade”.
Components of a Carbon Trading System
An effective carbon trading or cap and trade program will have a feasible cap that decreases emissions over time. However, if the cap is too high, then there will be an excess of emissions and the plan wouldn’t have any noticeable effect on the environment. It would also likewise drive down the value of the allowances and create a loss for the member firms.
If the cap were too low, then the allowances would become over priced and then would become scarcer. The governing body would have to release additional credits to stabilize the price. In effect, the governing body can direct the value of the “currency” which is the emission permits or carbon credits.
Have Carbon Trading/Cap & Trade Programs Been Effective?
The answer to this question can be often determined by whom you ask. In the United States, the Chicago Climate Exchange collapsed in 2010 as carbon commodities became like a penny stock with dwindling value. Also in 2010, the cap and trade climate change bill died in the US Senate. The European systems covering 12,000 companies in 30 nations is reported to be on target to slashing emissions 21% below 1990 levels, but has also been plagued by a $6 billion in tax fraud schemes and cyber-theft of $50 million in carbon credits in the Czech Republic. China has kicked off their carbon trading earlier this year with hopes of success.
A Successful Sulfur Dioxide Reduction Plan
So far the most successful business model has been with that of the sulfur dioxide (S02) from coal-fired plants causing acid rain that killed animal and plant life. Rather than mandating a specific way to do it with a regulating governmental body, the government let each company figure out their own way to obtain results. Each company in turn had their own market-based plan and not only did sulfur emissions go down quickly, but they were able to accomplish it at ¼ of the predicted cost. The program worked very well, and it had a high level of compliance. Power plant emissions dropped 50% below what they were in 1980. The sulfur dioxide reduction plan has been called the “Greatest Green Story of the Decade.”
The Future of Eliminating Carbon Emissions
As far as carbon trading is concerned in the US, all eyes now are on California, where California law has mandated that 33% of electricity come from renewable sources by 2020. This plan offers more potential long-term stability since government incentives that only last just one or two years at a time can cause boom-bust cycles upon expiration. What is the answer? Perhaps it is time to do two things: emulate the business models that have proven successful with existing carbon producing entities, while at the same time working towards replacing them with renewable energy sources.
Photo used this post is by vishwaant