Carbon trading

Definition

Carbon trading is a market-based mechanism that allows countries and companies to buy and sell carbon credits in order to limit greenhouse gas emissions. By assigning a monetary value to carbon emissions, this system incentivizes reducing emissions and encourages investments in cleaner technologies, aligning with efforts to mitigate climate change. It plays a significant role in balancing greenhouse gas emissions and fostering international cooperation in emission reductions.

5 Must Know Facts For Your Next Test

1. Carbon trading originated from the Kyoto Protocol, which established legally binding targets for developed countries to reduce greenhouse gas emissions.
2. The European Union Emissions Trading System (EU ETS) is the largest and most established carbon trading market, influencing global practices and policies.
3. Carbon trading can help companies meet their emission reduction targets at a lower cost compared to direct emission cuts, promoting economic efficiency.
4. The effectiveness of carbon trading often depends on the integrity of monitoring and reporting systems to ensure accurate measurement of emissions.
5. Critics argue that carbon trading can lead to loopholes, allowing companies to continue polluting while buying credits instead of making real changes to reduce their emissions.

Review Questions

• How does carbon trading create incentives for companies to reduce their greenhouse gas emissions?
  • Carbon trading creates financial incentives by allowing companies to buy and sell carbon credits based on their emission levels. If a company reduces its emissions below a certain threshold, it can sell its surplus credits to other companies that may be struggling to meet their limits. This not only encourages companies to innovate and adopt cleaner technologies but also promotes competition among businesses to lower their emissions cost-effectively.
• Evaluate the impact of international agreements like the Kyoto Protocol on the development of carbon trading systems worldwide.
  • International agreements like the Kyoto Protocol significantly shaped the development of carbon trading systems by establishing legally binding targets for greenhouse gas reductions among developed countries. This framework laid the groundwork for market-based mechanisms such as carbon trading, leading to the creation of various emissions trading systems globally. As a result, countries began implementing their own carbon markets, which facilitated cross-border trading and collaboration in efforts to combat climate change.
• Assess the long-term viability of carbon trading as a solution to combat climate change, considering both its strengths and weaknesses.
  • The long-term viability of carbon trading as a solution to combat climate change is supported by its ability to create economic incentives for emission reductions and promote innovation in clean technologies. However, its effectiveness can be undermined by issues such as insufficient caps, lack of stringent regulations, and potential market manipulation. For carbon trading to be truly effective, it needs robust monitoring, transparent reporting systems, and complementary policies that drive genuine emission reductions rather than allowing companies to rely solely on purchasing credits as a means of compliance.

Related terms

Carbon credits: Permits that represent the right to emit one metric ton of carbon dioxide or its equivalent in other greenhouse gases, which can be bought and sold within carbon trading systems.

Cap-and-trade: An environmental policy that sets a cap on total greenhouse gas emissions and allows industries with low emissions to sell their excess allowances to larger emitters.

Emissions trading system (ETS): A regulatory framework that enables carbon trading by creating a market for carbon credits and setting an overall cap on emissions for participating entities.