emissions trading involves the trading of permits
to emit carbon dioxide (and other greenhouse gases,
calculated in tonnes of carbon dioxide equivalent,
tCO2e). It is one of the ways countries can meet their
obligations under the Kyoto Protocol to reduce carbon
emissions and thereby mitigate global warming.
million metric tonnes of carbon dioxide equivalent
(tCO2e) have been exchanged through projects in 2004,
a 38% increase relative to 2003 (78 mtCO2e).
world's only mandatory carbon trading program
is the European Union Emissions Trading Scheme
(or EUETS). Created in conjunction with the Kyoto
Protocol, a 1997 international treaty that
took effect in 2005, it caps the amount of carbon
dioxide that can be emitted from large installations,
such as power plants and factories, in the EU's
25 member countries. (AP)
A country (or group of countries) caps its carbon
emissions at a certain level (this is known as cap
and trade) and then issues permits to firms and industries
that grant the firm the right to emit a stated amount
of carbon dioxide over a time period. Firms are then
free to trade these credits in a free market. Firms
whose emissions exceed the amount of credits they
possess will be heavily penalised. The idea behind
carbon trading is that firms that can reduce their
emissions at a low cost will do so and then sell their
credits on to firms that are unable to easily reduce
emissions. A shortage of credits will drive up the
price of credits and make it more profitable for firms
to engage in carbon reduction. In this way the desired
carbon reductions are met at the lowest cost possible
With the creation of a market for trading carbon dioxide
emissions within the Kyoto Protocol, it is likely
that London financial markets will be the centre for
this potentially highly lucrative business; the New
York and Chicago stock markets would like a share
(which is unlikely as long as the US rejects Kyoto).
The European Union's European Union Greenhouse Gas
Emission Trading Scheme (EU ETS) began operations
on 1 January 2005.
multinational corporations have come together in the
G8 Climate Change Roundtable, a business group formed
at the January 2005 World Economic Forum. The group
includes Ford, Toyota, British Airways and BP. On
9 June 2005 the Group published a statement stating
that there was a need to act on climate change and
stressing the importance of market-based solutions.
It called on governments to establish "clear,
transparent, and consistent price signals" through
"creation of a long-term policy framework"
that would include all major producers of greenhouse
There are critics of the schemes, mainly environmental
justice NGOs and movements who see carbon trading
as a proliferation of the free market into public
spaces and environmental policy-making. They point
to failures in accounting, dubious science and destructive
impacts of projects upon local peoples and environments
as reasons why trading pollution rights should be
avoided. Instead they advocate making reductions at
the source of pollution and energy policies that are
justice-based and community-driven.
National Allocation Plans by member governments of
the European Union Emission Trading Scheme have been
criticised due to some governments issuing more carbon
credits than emissions during Phase I of the scheme.
They have also been criticised for the widespread
practice of grandfathering, where polluters are given
carbon credits by governments, instead of being made
to pay for them. (Credit:
sign on to carbon trading scheme - The Sydney Morning
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