Carbon trading

Definition

Carbon trading is a market-based approach to controlling pollution by providing economic incentives for reducing greenhouse gas emissions. Under this system, companies are allocated a certain number of carbon credits, which represent the right to emit a specific amount of carbon dioxide. If a company emits less than its allowance, it can sell its excess credits to others that exceed their limits, creating a financial motivation for emission reductions and aligning business practices with international environmental agreements.

5 Must Know Facts For Your Next Test

1. Carbon trading is often linked to international agreements like the Kyoto Protocol, which set binding emission reduction targets for participating countries.
2. The effectiveness of carbon trading depends on a robust regulatory framework to ensure transparency and prevent market manipulation.
3. Businesses can benefit financially from carbon trading by investing in cleaner technologies and practices that reduce their emissions.
4. Some critics argue that carbon trading can lead to 'greenwashing,' where companies appear environmentally friendly without making significant changes to their practices.
5. Emerging markets for carbon credits have incentivized investments in renewable energy projects, contributing to sustainable development.

Review Questions

• How does carbon trading facilitate compliance with international environmental agreements?
  • Carbon trading allows countries and companies to meet their emission reduction targets set by international agreements by providing flexibility in how they achieve these goals. By allocating carbon credits based on expected emissions, businesses can either reduce their emissions or buy additional credits from those who have excess. This system creates a financial incentive for companies to invest in cleaner technologies, thereby aligning their operations with global environmental objectives.
• Discuss the potential advantages and disadvantages of implementing a carbon trading system within an economy.
  • Implementing a carbon trading system can lead to several advantages, including cost-effective emission reductions and the promotion of innovative technologies. It allows businesses to find the most economically efficient ways to lower their emissions while generating revenue through the sale of surplus credits. However, disadvantages include the complexity of establishing a fair market, potential for market manipulation, and criticisms regarding the effectiveness of such systems in driving real change versus mere financial transactions.
• Evaluate the long-term implications of carbon trading on global efforts to combat climate change and how it might evolve in response to emerging environmental challenges.
  • The long-term implications of carbon trading could be significant as it creates a mechanism for businesses and governments to collaborate on emission reductions. As global awareness of climate change grows, carbon trading systems may evolve to become more integrated with other environmental policies, potentially expanding into areas like biodiversity and water usage. Additionally, if carbon pricing becomes more widespread, it could drive major shifts in corporate strategies towards sustainability and innovation, ultimately enhancing global efforts against climate change.

Related terms

Cap-and-Trade: A regulatory system that caps the total level of greenhouse gas emissions and allows industries with low emissions to sell their extra allowances to larger emitters.

Carbon Credits: Permits that represent the right to emit one metric ton of carbon dioxide or its equivalent in other greenhouse gases, used as a unit in carbon trading.

Emissions Trading System (ETS): A market for trading emission allowances, designed to reduce overall greenhouse gas emissions by allowing companies flexibility in how they meet their targets.