Carbon trading

Definition

Carbon trading is a market-based system designed to reduce greenhouse gas emissions by allowing countries or organizations to buy and sell emission allowances. This approach creates a financial incentive for companies to lower their emissions, as those who reduce their emissions below a certain cap can sell their excess allowances to others who are struggling to meet their limits. This mechanism is often implemented within international environmental agreements to facilitate compliance and promote global climate goals.

5 Must Know Facts For Your Next Test

1. Carbon trading is part of efforts like the Kyoto Protocol and the Paris Agreement, which aim to limit global temperature rise by reducing greenhouse gas emissions.
2. The market for carbon trading can involve various stakeholders, including governments, private companies, and non-governmental organizations, making it a complex system.
3. Trading allows flexibility in how emissions reductions are achieved, enabling companies that can reduce emissions cheaply to sell their credits to those facing higher costs.
4. There are concerns about the effectiveness of carbon trading, as it can lead to 'greenwashing' if companies rely too much on purchasing credits instead of making real changes.
5. Carbon trading systems vary widely across regions, with different rules and cap levels impacting how successful they are in achieving emission reduction goals.

Review Questions

• How does carbon trading function within international environmental agreements and what are its intended outcomes?
  • Carbon trading operates by establishing a market for emission allowances that countries or companies can buy or sell. Within international agreements, it is designed to create economic incentives for reducing greenhouse gases while allowing flexibility in compliance. The intended outcomes are to lower overall emissions effectively and efficiently by leveraging market mechanisms while ensuring that commitments made under such agreements are met.
• Evaluate the advantages and disadvantages of carbon trading as a strategy for reducing greenhouse gas emissions.
  • The advantages of carbon trading include cost-effectiveness in reducing emissions, flexibility for businesses, and the potential for generating revenue through the sale of allowances. However, disadvantages include the risk of market volatility, potential for abuse or manipulation of the system, and the challenge of ensuring that actual emission reductions occur rather than just financial transactions. Additionally, it may not address systemic issues related to fossil fuel dependence.
• Assess the effectiveness of carbon trading in meeting global climate change targets and suggest improvements for future systems.
  • The effectiveness of carbon trading in meeting global climate change targets has been mixed. While it has helped some countries reduce emissions effectively, critics argue that it sometimes allows companies to avoid making substantial changes. To improve future systems, enhancing transparency in trading practices, increasing regulatory oversight, and setting stricter caps could help ensure real reductions occur. Furthermore, integrating carbon trading with broader sustainability initiatives could lead to more holistic approaches in tackling climate change.

Related terms

Cap-and-Trade: A system where a limit (cap) is set on emissions, and companies can buy or sell allowances for emissions, creating a financial market for carbon credits.

Emissions Allowance: A permit that allows the holder to emit a specific amount of greenhouse gases; these can be traded in carbon markets.

Kyoto Protocol: An international treaty that commits its parties to reduce greenhouse gas emissions, with mechanisms like carbon trading to help achieve targets.