Carbon trading

Definition

Carbon trading is an economic practice that allows countries, companies, or organizations to buy and sell carbon credits, which represent the right to emit a certain amount of carbon dioxide or other greenhouse gases. This market-based approach aims to reduce overall greenhouse gas emissions by creating financial incentives for lower emissions and encouraging investment in cleaner technologies, directly linking it to the impacts of carbon dioxide and methane on climate change.

5 Must Know Facts For Your Next Test

1. Carbon trading systems can operate at various levels, including international, national, and regional markets, each with its own rules and mechanisms.
2. The European Union Emissions Trading System (EU ETS) is one of the largest and most established carbon trading schemes in the world.
3. By allowing the trading of carbon credits, carbon trading encourages companies to reduce their emissions more efficiently, as they can sell excess credits if they outperform their targets.
4. Carbon trading is often criticized for allowing companies to buy their way out of making real emissions reductions, which can undermine the effectiveness of climate policies.
5. This practice is a key component in international agreements like the Kyoto Protocol and the Paris Agreement, aiming to collectively lower global greenhouse gas emissions.

Review Questions

• How does carbon trading create incentives for companies to reduce greenhouse gas emissions?
  • Carbon trading creates financial incentives by allowing companies to buy and sell carbon credits based on their emissions. Companies that reduce their emissions below a set limit can sell their surplus credits to others who are exceeding their limits. This not only motivates companies to invest in cleaner technologies but also encourages competition among firms to find cost-effective ways to lower emissions, ultimately leading to a more significant overall reduction in greenhouse gases.
• Evaluate the effectiveness of cap-and-trade systems in reducing carbon emissions compared to direct regulatory measures.
  • Cap-and-trade systems can be effective in reducing carbon emissions by setting a clear limit on total emissions while allowing market forces to determine the most efficient ways to meet those limits. Unlike direct regulatory measures, which may impose uniform requirements across industries, cap-and-trade offers flexibility and encourages innovation. However, its success can depend on factors like market design, enforcement mechanisms, and how well it addresses issues like market manipulation or unequal impacts across different sectors.
• Assess the potential impacts of carbon trading on global efforts to combat climate change, considering both benefits and criticisms.
  • Carbon trading has significant potential benefits for global climate efforts by enabling cost-effective emission reductions and encouraging investment in clean technology. However, it also faces criticisms such as allowing companies to evade real cuts by purchasing credits instead of reducing emissions directly. Moreover, concerns about equity arise when wealthier nations or corporations disproportionately benefit from trading schemes. A balanced assessment shows that while carbon trading can be an important tool in reducing greenhouse gases, it must be carefully designed and regulated to ensure it complements direct action against climate change.

Related terms

carbon credits: Permits that allow the holder to emit a specific amount of carbon dioxide or equivalent greenhouse gases, which can be traded in carbon markets.

cap-and-trade: A regulatory system that sets a limit (cap) on total greenhouse gas emissions and allows entities to trade allowances under this cap, promoting cost-effective emission reductions.

greenhouse gases:

Gases that trap heat in the atmosphere, including carbon dioxide (CO2) and methane (CH4), contributing to climate change and global warming.