carbon trading | Emissions Trading | Change

Carbon emissions trading is a form of emissions trading that specifically targets carbon dioxide (calculated in tonnes of carbon dioxide

equivalent or tCO2e) and it currently constitutes the bulk of emissions trading. This form of permit trading is a common method countries utilize in order to meet their obligations specified by the Kyoto Protocol; namely the reduction of carbon emissions in an attempt to reduce(mitigate) future climate change.
Contents
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1 Economics

o o o o o o o

1.1 Costs and valuation 1.2 Ethics and fairness 1.3 Coase 1.4 Equity 1.5 Taxes versus caps 1.6 Trading 1.7 Incentives and allocation

2 Units 3 Market trend 4 Business reaction 5 Voluntary surrender of units 6 Criticisms

o

6.1 Structuring issues

7 See also 8 References 9 External links

[edit]Economics Emissions trading works by setting a quantitative limit on the emissions produced by emitters. The economic basis for emissions trading is linked to the concept of property rights (Goldemberg et al.., 1996, p. 29).[1] [edit]Costs

and valuation

g. p. 2005.. External costs may affect the welfare of others.g. 6). In the case of climate change. These other costs are called external costs (Halsnæs et al. [10] and Helm. e. as well as [4] affecting the natural environment (Toth et al. 2008.e. tourism in particular regions benefiting from climate change. 4) [11] argued that social costs could be accounted for by negotiating property rights according to a particular objective.. 2001). the emitter faces the full (social) costs of their actions (IMF. They are "external" [2] because they are costs that the emitter does not face. valuations of human health impacts. GHG emissions affect the welfare of people living in the future. 2007). but there are other costs that are not necessarily included in the price of a good or [3] service. e. offset negative impacts in [9] other regions. e.. In doing this..g.. There is no consensus among economists over how to value the fairness (economists use the term equity to mean fairness) of a particular climate policy. p..g. e. p. how to share the burden of costs for mitigating future climate change (Toth et al..g. 2001)... [edit]Ethics and fairness The way of dealing with climate change has particular ethical issues and other issues related to the fairness of the problem. These external costs can be estimated and converted in a common (monetary) unit. [6] Nor do economists have any professional expertise in making ethical decisions..The problem of climate change is one where emitters of greenhouse gases (GHGs) do not face the full cost implications of their actions (IMF. To actually calculate social costs requires value judgements about the value of [5] future climate impacts (Smith et al.. 2001). Coase's model assumes perfectly operating markets and equal bargaining power among those arguing for property rights.. For climate change. it should .[7] Typically all the impacts of policy.. however.. [8] or ecosystems (Smith et al." i. Valuations can be difficult since not all goods have a market price. There is also controversy over how potentially positive climate impacts.. e. with different impacts on different individuals assigned particular "weightings.g. over the value assigned to the welfare of future generations (Arrow et al. However. There are costs that emitters do face... reduced food production (Smith et al. There are methods to infer prices for "non-market" goods and services. 1996. e. these valuations can be controversial and disenfranchise the indigenous people. 2001.. 2001). the property rights are for emissions (permits or quotas). 130). both the costs and benefits. p. 9).. The main advantage of economic analysis in this area is that it allows a comprehensive and consistent treatment of climate change impacts. the costs of the fuel being used. It also allows the benefits of climate change policy decisions to be compared against other possible environmental policies.. The argument for doing this is that these external costs can then be added to the private costs that the emitter faces. [edit]Coase Coase (1960) (referred to by Toth et al. These valuations are decided by the economist doing the study. relative levels of importance. 2001). 2008. are added together (aggregation)..

. efficiency can also be promoted by allowing "banking" of permits (Goldemberg et al. p. [16] On the other hand. [18] Supporters of carbon cap-and-trade systems believes it sets legal limits for emissions reductions.. Proponents argue that a carbon tax is more easy and simple to enforce on a broad-base scale than cap-and-trade programs.... and that regardless of how these property rights are assigned. is promoted by the market system. inventors.. efficiency. 2007). It is therefore argued that with emissions trading..g. forests.[1] In Coase's model. 28±29). etc. e. they have no incentive to cut emissions (Smith. p. This can also be looked at from the perspective of having the greatest flexibility to reduce emissions. Canada . 268). which may not be .. the market will produce the most efficient outcome (Goldemberg et al. markets are not perfect. i. Taxing can provide the right incentives for polluters. the ocean.[13] [edit]Taxes versus caps A large number of papers in the economics literature suggest that carbon taxes should be preferred to carbon trading (Carbon Trust. [12] Over time. 1996. p. in addition to creating revenue for the government.enacted and implemented in five months. pp. that is to say. Flexibility is desirable because the marginal costs. polluters have an incentive to cut emissions. With a tax. and it is therefore possible that a trade off will occur between equity and efficiency (Halsnæs et al. 2008. rather than the revenues going to the government.be noted that other factors affect the climate other than just emissions. Emissions trading allows emission reductions to be first made in locations where the marginal costs of abatement are lowest (Bashmakov et al. The simplicity and immediacy of a carbon tax has been proven effective in British Columbia. the incremental costs of reducing emissions. 1996. [edit]Equity One of the advantages of Coase's model is that it suggests that fairness (equity) can be addressed in the distribution of property rights. 29). achieving a given reduction in emissions at lowest cost.e. freely distributing emission permits could [17] potentially lead to corrupt behaviour (World Bank. and a pure carbon cap places a limit on carbon emissions. 56±57). letting the market price of tradable carbon allowances vary. pp.[14] Counter-arguments to this are usually based on the possible preference that politicians may have for emissions trading compared with taxes (Bashmakov et al. industries may successfully lobby to exempt themselves from a carbon tax. there can be estimates of reduction in carbon emissions. 1996.[1] In reality. A pure carbon tax fixes the price of carbon. 2010. but allows the amount of carbon emissions to vary.. This allows polluters to reduce emissions at a time when it is most efficient to do so. 2001).[15] One of these is that emission permits can be freely distributed to polluting industries. but if they are exempted from a carbon tax. (Goldemberg et al.... and engineers to develop cleaner technologies. In comparison.. 30).. varies among countries. 2001). unlike with carbon taxes . 2009).

pp. 417).g. For example. [23] [22] . 25±26).g. a permit system where permits are auctioned rather than given away. Grandfathering may also reduce the rate of technological improvement towards less polluting technologies (Fisher et al.. In reality. private brokerage firms.[2] This problem can also be criticized on ethical grounds. p. since the polluter is being paid to reduce emissions [1] (Goldemberg et al.g.. a firm that reduced its emissions would receive fewer permits in the future (IMF. [20] [19] It may also improve the efficiency of system. can allow for better management of risk in the system.. there are possible perverse incentives that can exist in emissions trading... [edit]Trading In an emissions trading system.. provides the government with revenues. The cost is imposed elsewhere in the economy. such as insider trading. 417). As the permits are scarce they have value and the benefit of that value is acquired in full by the emitter. e.[22] Nordhaus points out that normal income.[21] In Coase's model of social costs. The economist William Nordhaus argues that allocations cost the economy as they cause the under utilisation an efficient form of taxation. permits may be traded by emitters who are liable to hold a sufficient number of permits in system. According to Bashmakov et al.. e. 1996. by funding reductions in distortionarytaxes (Fisher et al. meaning that polluting industries may be kept in business longer than would otherwise occur. Form of allocation The economist Ross Garnaut states that permits allocated to existing emitters by 'grandfathering' are not 'free'. These revenues might be used to improve the efficiency of overall climate policy.. On the other hand. grandfathering subsidizes polluters.. e. to variations in permit prices (Bashmakov et al. so by using pollution taxes to generate revenue an emissions scheme can increase the efficiency of the economy. as is done in other financial markets. Allocating permits on the basis of past emissions ("grandfathering") can result in firms having an incentive to maintain emissions. 2008. unlike rigid taxes. 2001). either choice (grandfathering or auctioning) leads to efficiency. A declining cap gives allowance for firm reduction targets and a system for measuring when targets are met. goods or service taxes distort efficient investment and consumption.g. 1996... 1996. It also allows for flexibility.. (2001). However. 38). p. to prevent abuses of the system. typically on consumers who cannot pass on the costs.. e. [edit]Incentives and allocation Emissions trading gives polluters an incentive to reduce their emissions.sufficient to change the course of climate change. p. regulation of these other entities may be necessary. Some analysts argue that allowing others to participate in trading.

374 million metric tonnes of carbon dioxide equivalent (tCO2e) were exchanged through projects in 2005.8 of the Protocol. [27] [26] which was itself a 41% The increasing costs of permits have had the effect of increasing costs of carbon emitting fuels and activities. and failing to expand as much as. Transfers and acquisitions of these units are to be tracked and recorded systems under the Kyoto Protocol. land-use change and forestry (LULUCF) activities under Articles 3.4 of the Kyoto Protocol. There is no basis for compensation arising from the loss of profits or asset values as a result of this new policy.  A removal unit (RMU) issued by an Annex I Party on the basis of land use. [28] This would suggest that a lowering cap on carbon emissions will likely lead to an increase in the costs of alternative power sources.7 and 3. According to the World Bank's Carbon Finance Unit. a 240% increase relative to 2004 (110 mtCO2e) increase relative to 2003 (78 mtCO2e). they would in a world in which all countries were applying carbon constraints involving similar costs to ours. Whereas a sudden lowering of a carbon emission cap may prove detrimental to economies.  A certified emission reduction (CER) generated from a clean development mechanism project activity under Article 12 of the Kyoto Protocol.|||Ross Garnaut [edit]Units The units which may be transferred under Article 17[clarification needed] emissions trading. [edit]Market [citation needed] [clarification needed] through the registry trend Carbon emissions trading has been steadily increasing in recent years. Based on a survey of 12 European countries. may be in the form of:  [25] [24] An assigned amount unit (AAU) issued by an Annex I Party on the basis of its assigned amount pursuant to Articles 3. It is to avoid the economic and environmental costs of having firms in these industries contracting more than.3 and 3. emissions-intensive industries is different and sound. each equal to one metric tonne of emissions (in CO2-equivalent terms).{{cquote|It is important that we stop thinking in terms of payments to Australian firms in order to compensate them for the effects of the domestic emissions trading scheme. a gradual lowering of the cap may risk future environmental damage via global warming. The rationale for payments to trade-exposed. it was concluded that an increase in carbon and fuel prices of approximately ten percent would result in a short-run increase in electrical power prices of roughly eight percent.  An emission reduction unit (ERU) generated by a joint implementation project under Article 6 of the Kyoto Protocol. .

and consistent price signals" through "creation of a longterm policy framework" that would include all major producers of greenhouse gases. a business group formed at the January 2005 World Economic Forum. In 1992. 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. Sandbag states that it has cancelled carbon credits equivalent to 2145 [38] tonnes of CO2.[34] [edit]Voluntary surrender of units There are examples of individuals and organisations purchasing tradable emission permits and 'retiring' (cancelling) them so they cannot be used by emitters to authorise their emissions.[35] The British organization "Climakind" accepts donations and uses them to buy and cancel European Allowances. [31] Twenty three multinational corporations came together in the G8 Climate Change Roundtable.[33] Business in the UK have come out strongly in support of emissions trading as a key tool to mitigate climate change." [29] With the creation of a market for mandatory trading of carbon dioxide emissions within the Kyoto Protocol. is projected to grow to about $4bn by 2010. It called on governments to establish "clear. It is argued that this removes the credits from the carbon market so they cannot be used to allow the emission of carbon and that this reduces the 'cap' on emissions by reducing the number of credits available to emitters. The group included Ford.[32]By December 2007 this had grown to encompass 150 global businesses. British activist Merrick Godhaven has criticised Sandbag's approach of voluntarily cancelling carbon credits because it would require millions of pounds to be effective and because it signals acceptance of . the carbon credits traded in the European Union Emission Trading System. [37] As of August 2010. supported by Green NGOs. and is expected to have grown into a market valued at $60 billion in 2007. transparent. Toyota. [36] The British organisation Sandbag promotes cancelling carbon credits in order to lower emissions trading caps.British Airways. the National Healthy Air License Exchange was established to pool donations for buying and retiring sulfur allowances under the USA sulfur allowance trading program. This makes the emissions 'cap' lower and therefore further reduces emissions. the London financial marketplace has established itself as the center of the carbon finance market.[edit]Business reaction Economist Craig Mellow wrote in May 2008: ³The combination of global warming and growing environmental consciousness is creating a potentially huge market in the trading of pollution-emission credits.[30][not in citation given] The voluntary offset market. by comparison. BP and Unilever.

2008. and so a market-led approach is likely to reinforce technological lock-in. It is unjust as it seeks out the lowest cost emissions reductions. They also argue that emissions trading is undermining alternative approaches to pollution control[clarification needed] with which it does not combine well. such as Carbon Trade Watch. Godhaven considers carbon trading is a flawed response to reducing emissions for several reasons. which may be different to the pathway required to obtain sustained and sizable reductions over a longer period. 13). And the free allocation of permits to EU power and steel companies resulted in windfall profits. Other countries could buy these allowances from Russia. usually of poorly verified offsets in less developed countries. campaigning group FERN released "Trading Carbon: How it works and why it is controversial" [43][Full citation needed]which compiles many of the arguments against carbon trading.. p.[41] Critics of carbon trading. [39] [edit]Criticisms It has been argued that trading is a form of colonialism.[40] Nations that have fewer financial resources may find that they cannot afford the permits necessary for developing an industrial infrastructure. Other criticisms include the questionable level of sustainable development promoted by the Kyoto Protocol's Clean Development Mechanism. but this would not reduce emissions. For example. where larger cuts would require scrapping the technology and using a different one. p. distracting attention from the wider.[44][clarification needed] Lohmann (2009) pointed out that emissions trading schemes create new uncertainties and . In practice. argue that it places disproportionate emphasis on individual lifestyles and carbon footprints. and so the overall effect it is having is to actually stall significant change to less polluting technologies. For instance. where rich countries maintain their levels of consumption while getting credit for carbon savings in inefficient industrial projects (Liverman. 2008. small cuts may often be achieved cheaply through investment in making a technology more efficient. 16). a system designed by polluters. The caps on emissions are set by industry lobbying. In September 2010.. it would simply be a redistribution of emissions allowances.[42][Full citation needed] Groups such as the Corner House have argued that the market will choose the easiest means to save a given quantity of carbon in the short term. thus inhibiting these countries economic development. The Financial Times published an article about cap-and-trade systems which argued that "Carbon markets create a muddle"[clarification needed] and ". Russia has a surplus of allowances due to its economic collapse following the end of the Soviet Union (Liverman. not by science. Rather.leave much room for unverifiable manipulation". Kyoto Parties have as yet chosen not to buy these surplus allowances (PBL.carbon trading. Another criticism is of non-existent emission reductions produced in the Kyoto Protocol due to the surplus ("hot air") of allowances that some countries have. systemic changes and collective political action that needs to be taken to tackle climate change. 2009).

Cambridge. Cambridge.K. et al. N.risks.. Bruce et al. ^ Goldemberg. The principal point here is that financial system innovations (outside banking) open up the possibility for unregulated (non-banking) transactions to take place in relativity unsupervised markets. Retrieved 2010-04-26. thereby creating a new speculative market. [edit]See also Energy portal    Low carbon power generation New South Wales Greenhouse Gas Abatement Scheme Personal carbon trading [edit]References a b c d 1.[clarification needed] which was being actively considered by the Irish Parliament in May 2008. 2.. This version: Printed by Cambridge University Press. "2. "Introduction: scope of the assessment.. U. (1996).[46] These schemes state that cap-and-trade or cap-and-tax[clarification needed] schemes inherently impact the poor and those in rural areas. J. U. Climate Change 2007: Mitigation. and the Sky Trust schemes.[vague] which can be commodified by means of derivatives.S. K.A. Framing issues. In: Climate Change 1995: Economic and Social Dimensions of Climate Change. and New York. ISBN 9780521568548.. ^ Halsnæs.4 Cost and benefit concepts. PDF version: IPCC website. "Fiscal Implications of Climate Change". N. Contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change. U.A. Fiscal Affairs Department. including private and social cost perspectives and relationships to other decision-making frameworks". U.2277/0521568544..S..[45][clarification needed] Recent proposals for alternative schemes to avoid the problems of cap-and-trade schemes include Cap and Share. Retrieved 2010-04-26. In J... The principle being that poorly supervised markets open up the possibility of structuring to take place. Cambridge University Press. International Monetary Fund. 3.Y.Y. . Metz et al. doi:10. (PDF).. et al (2007). ^ a b IMF (March 2008). the goal being to reduce global warming) have been modified in ways that have been attributed to permitting money laundering to take place [1].K.". who have less choice in energy consumption options. [edit]Structuring issues Corporate and governmental Carbon emission trading schemes (a trading system devised by economists to reduce CO2 emissions. In B. and New York.P. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change.

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Retrieved 2010-04-28. 25. Cambridge. (2009). (1996). ^ Garnaut. 26.uk). ^ "About Sandbag". Ross (2008). ISBN 0-67399472-4.. ISBN 9780521744447.by taking a permit out of the system we can reduce the amount of pollution taking place and force industry to invest in cleaner technologies. The Garnaut Climate Change Review. can place a bid. Climate Change 1995: Economic and Social Dimensions of Climate Change.Y. Every permit removed from the system means one less tonne of greenhouse gas in the atmosphere. Substitution and Technological Change Under Carbon Cap and Trade : Lessons from Europe".Error page 35.. UK . N. and New York. This version: GRID-Arendal website.. The World Bank. This version: Printed by Cambridge University Press.FINAL .4. FT April 27. including environmental groups. 29. Every retired ton of sulfur oxide allowances represents an authorized ton of pollution that will not be emitted. Retrieved 2010-04-04.weforum... Climakind (www. 30. Cambridge University Press. Tom (1996). Retrieved 2010-04-28.doc 28. May 2008.2277/0521568544. 2007 32. Timothy J. Bruce et al. Environmental and Natural Resource Economics..org/pdf/g8_climatechange.org/docs/StateoftheCarbonMarket2006. 37. U. PDF version: IPCC website. "Periodically a small proportion of allowances are auctioned off. Policy Research working paper no. U.sandbag.A. Successful bidders acquire allowances for whatever purpose they see fit including "retiring" them so they cannot be used to legitimize emissions. 22. ^ Tietenberg.org.Carbon Market Study 2005 .University Press. Harper Collins. William (2007). In J..K.pdf 27. Oxford University Press. Cambridge University Press. and New York. ^ The carbon market Fiona Harvey. 24.com). Larson. Retrieved 2010-04-28. 2008. "To Tax or Not to Tax: Alternative Approaches to Slowing Global Warming".S. ^ List of climate leaders EPA {December 12] 34.Letter. ^ Fisher. U.pdf 33. ^ Institutional investor.. "An Economic Assessment of Policy Instruments for Combating Climate Change". 23.1. ^ a b Nordhaus. Retrieved 2010-04-26. et al.Anyone.P. Retrieved 2010-02-21. ^ "Strengthening the ETS".K. 21. ". ^ Point Carbon news 31.. ^ Considine. (p 387)" 36. Sandbag (www. 96-100.A. (PDF). 2010. UNFCCC. "Releasing permits into the market"..climakind. ^ Defra. N. ^ http://carbonfinance. WPS 4957. U. Retrieved 2010-08-03. doi:10. "19. ISBN 9780521568548. Contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change." . B. Cambridge.S. p. ^ "The Garnaut Climate Change Review". ^ Microsoft Word .S. ^ http://www. Retrieved 2010-08-03. Donald F. ^ "Emissions Trading".Y.

Earthscan .38. Simon Kirby.1016/j.  Chandler: More Flexibility Needed for Effective Emissions Cap-and-Trade Policy Council on Foreign Relations  Green Structured Products are likely to Proliferate piece by Edmund Parker and Nicole Purin.org. New Political Economy. 2007-04-26.M. ^ "Carbon markets create a muddle". published in Financial News. published November 2009 by Dag Hammarskjöld Foundation: A booklet on various Emissions Trading Schemes (CDM. first published August 2009. Retrieved 200908-08.uk).) [edit]External links  "The Making of a Market-Minded Environmentalist".How it works and why it fails. "Industrialised countries will collectively meet 2010 Kyoto target". D. Jean Goggin. Noel Casserly. Sandbag (sandbag. ^ Larry Lohmann: Uncertainty Markets and Carbon Markets. Martin O¶Brien and Lisa Ryan. ETS) with case studies from Indonesia. Retrieved 2009-04-03. Budget Perspectives. doi:10. ^ "Carbon Trade Watch". Retrieved 2010-08-04.jhg. 43. Retrieved 2010-04-26. Tim Callan (ed. Retrieved 2010-0516. ^ Ray Barrell. 40. ^ Godhaven. REDD.08. "Conventions of climate change: constructions of danger and the dispossession of the atmosphere".headheritage. abstract and full text 46.008. Brazil.co.2008. "2145 tonnes of CO2 have been cancelled on behalf of Sandbag members"[dead link] 39. ^ "Cancelled permits". Ide Kearney. 2009. Merrick (2009-11-29). 3 December 2007  Arnaud Brohe: Carbon Markets. 45.Chapters 14 and 15 have extensive discussions on emission trading schemes and carbon taxes  Carbon Trading . ^ Liverman. article by Fred Krupp in Strategy+Business (registration reqd) that articulates some of the reasoning and history behind emissions trading inCalifornia  The Stern Review on the economics of climate change . Alan Barrett. Financial Times. Mayer Brown. (2008). Thailand and India. Journal of Historical Geography 35: 279. Pete Lunn. ^ "Trading Carbon". Frank Convery. Julian Cope presents Head Heritage U-Know! (www. Variations on Polanyian Themes. 44. Netherlands Environmental Assessment Agency (PBL) website. ^ PBL (16 October 2009). 41. "Burying Heads in the Sandbag: Helping the Market Bring Climate Catastrophe".uk). 42.

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