Carbon trading

Definition

Carbon trading is an environmental policy tool that allows countries or companies to buy and sell permits to emit carbon dioxide (CO2) and other greenhouse gases. This system creates a financial incentive for reducing emissions by enabling entities that reduce their emissions below a certain cap to sell their excess allowances to those who exceed their limits, ultimately aiming to lower overall emissions on a global scale.

5 Must Know Facts For Your Next Test

1. Carbon trading emerged as a significant strategy during international agreements like the Kyoto Protocol, where countries committed to reducing greenhouse gas emissions.
2. The trading system operates on the principle that not all entities have the same costs for reducing emissions, allowing for a more cost-effective overall reduction.
3. Carbon markets can be divided into compliance markets, where trading is regulated by law, and voluntary markets, where companies participate without legal obligations.
4. Successful carbon trading requires robust measurement and verification systems to ensure accurate tracking of emissions reductions and permit allocations.
5. Critics of carbon trading argue that it can lead to 'offsetting' practices where companies may buy permits instead of making real changes to reduce their emissions.

Review Questions

• How does carbon trading function as a market-based approach to reducing greenhouse gas emissions?
  • Carbon trading functions as a market-based approach by setting a cap on total greenhouse gas emissions and allowing companies or countries to trade emission permits. Entities that lower their emissions below the cap can sell their surplus allowances to those that are unable or unwilling to meet their limits. This creates financial motivation for reducing overall emissions, promoting innovation in cleaner technologies while ensuring compliance with environmental regulations.
• Discuss the potential advantages and disadvantages of implementing carbon trading systems in the context of global environmental treaties.
  • The advantages of carbon trading systems include promoting cost-effective emission reductions, encouraging technological innovation, and providing flexibility for businesses in meeting regulatory requirements. However, disadvantages include the risk of market volatility, potential loopholes that may allow excessive emissions, and the challenge of ensuring equity among countries with varying economic capabilities. Furthermore, if not implemented effectively, carbon trading could lead to superficial compliance rather than meaningful reductions in greenhouse gases.
• Evaluate how carbon trading interacts with other environmental policies and what implications this interaction has for achieving global climate goals.
  • Evaluating the interaction between carbon trading and other environmental policies reveals that carbon markets can complement regulations such as renewable energy mandates and pollution standards. However, if these policies are not aligned effectively, there may be conflicts that undermine overall climate goals. For instance, overly stringent regulations alongside lax carbon trading could incentivize businesses to exploit trading rather than invest in sustainable practices. Ultimately, harmonizing these strategies is crucial for achieving comprehensive and impactful global climate objectives.

Related terms

Cap-and-trade: A market-based approach to controlling pollution by providing economic incentives for achieving reductions in the emissions of pollutants.

Greenhouse gases: Gases that trap heat in the atmosphere, including CO2, methane (CH4), and nitrous oxide (N2O), which contribute to global warming.

Emission allowances: Permits issued by regulatory authorities that allow a holder to emit a specific amount of greenhouse gases, which can be traded in carbon markets.