INTRODUCTION Carbon trading is a practice which is designed to reduce overall emissions of carbon dioxide, along with other greenhouse

gases, by providing a regulatory and economic incentive. In fact, the term “carbon trading” is a bit misleading, as a number of greenhouse emissions can be regulated under what are known as cap and trade systems. For this reason, some people prefer the term “emission trading,” to emphasize the fact that far more than just carbon is being traded. This practice is part of a system which is colloquially referred to as a “cap and trade.” Under a cap and trade system, a government sets a national goal for total greenhouse gas emissions over a set period of time, such as a quarter or a year, and then allocates “credits” to companies which allow them to emit a certain amount of greenhouse gases. If a company is unable to use all of its credits, it can sell or trade those credits with a company which is afraid of exceeding its allowance. Carbon trading provides a very obvious incentive for companies to improve their efficiency and reduce their greenhouse gas emissions, by turning such reductions into a physical cash benefit. In addition, it is a disincentive for being inefficient, as companies are effectively penalized for failing to meet emissions goals. In this way, regulation is accomplished largely through economic means, rather than through draconian government measures, encouraging people to engage in carbon trading because it's potentially profitable. As a general rule, carbon trading is paired with an overall attempt to reduce carbon emissions in a country over an extended period of time, which means that each year; the number of available credits will be reduced. By encouraging companies to become more efficient ahead of time, a government can often more easily meet emissions reduction goals, as companies will not be expected to change practices overnight, and the carbon trading system creates far more flexibility than setting blanket baseline levels. In some countries, carbon exchanges have opened up, operating much like stock exchanges. These organizations facilitate the exchange of carbon, ensuring that they flow smoothly through the market, and they provide standard set prices for credits, based on market demand and general economic health. In some cases, individual citizens can also participate in carbon trading, purchasing credits to offset their own greenhouse gas emissions, and some advocates have suggested that carbon trading should be formally expanded to all citizens, encouraging global and individual involvement in reduction of greenhouse gas emissions. Participants in carbon trading buy and sell contractual commitments or certificates that represent specified amounts of carbon-related emissions that either:  are allowed to be emitted;  comprise reductions in emissions (new technology, energy efficiency, renewable energy); or  comprise offsets against emissions, such as carbon sequestration (capture of carbon in biomass).

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namely offsetting their emissions against carbon sequestered in biomass. An emission trading does not mean an exemption from reductions. sellers of carbon sequestration provide entities with another alternative. Emissions trading were introduced as means to lower the lower the global production of greenhouse gases. generate large amounts of emissions free energy and sell the reduction credits to a country where there is less wind and possibly higher costs to achieve reductions with similar turbines. Trading moves an emission reduction from one place to another. and other places. For example. while participants report their reduction schedule. Kyoto. These countries are not sure how to achieve reductions and still grow their economies without hurting themselves. If not. where the money for the project came from. they maintain trading privileges. How emission trading is applied Over 30 countries have agreed to reduce annual greenhouse gas emissions by an average of 7%. These countries (so called Annex countries) can trade ERC's with each other to level out the cost of achieving emission reductions. Each country reports yearly to the IPCC its total emissions and emission reductions. a country where there is plenty wind can put up turbines. This convention meets to address the growing suspicion that some gases are trapping heat in earth's atmosphere. and the credits are automatically transferred to Denmark. A global accounting system keeps track of what trades were made and whether participants are meeting their reduction targets. and the second group without commitments. Recent US proposals to build capacity for this new sector are the Climate Stewardship act and other legislation. Buenos Aires. It is cost-effective because the entities that have achieved their own emission reduction target easily will be able to create emission reduction certificates "surplus" to their own requirements. So bi-lateral trading is OK between the group with emission reduction commitments. For example. Similarly. These entities can sell those surpluses to other entities that would incur very high costs by seeking to achieve their emission reduction requirement within their own business. 2 |Page . If they are on track with their reductions. How carbon trading came out Many changes in how Greenhouse Gases (GHG's) are being treated are due to policies proposed a UNFCCC conferences held at Rio de Janeiro. possibly altering normal climate behavior. Not all countries have committed to emission reduction schedules. To enable reductions in this second group of countries.People buy and sell such products because it is the most cost-effective way to achieve an overall reduction in the level of emissions. a windfarm is placed in India. assuming that transaction costs involved in market participation are kept at reasonable levels. penalties or sanctions may be imposed. one-way trades are permitted.

The market price for these allowances is $ 10 per tonne.000 tones of surplus allowances that company A is offering. where total emissions are limited or 'capped'. Each emits 100.000) it will be able to recover its entire expenditure. If company B reduced its own emissions. Both firms. It gives each company rights. TYPES OF CARBON TRADING There are two kinds of carbon trading. the cost is only $ 50.000 tones this year.000.000 tones or buy 5. The Kyoto Protocol is a cap and trade system in the sense that emissions from Annex B countries are capped and that excess permits might be traded. However. Some emissions trading schemes allow companies to save any surplus allowances they have for their own use in future years. it would cost $ 75. 1. 2. But if it buys company A’s surplus allowances.000. Rules defining reporting measures. Suppose there are two companies. making reductions is more expensive. So the company saves $ 25.000 tones (for $ 50. and soon there will be an internationally recognized game plan. compliance standards etc.000 tones of carbon dioxide a year. beyond the cap (Point Carbon). We expect that many RE producers will be able to claim benefits when domestic and international trading schemes start up. For company B.Rules and modalities Key to emissions trading is keeping track of what is being traded. A cap and trade system is an emissions trading system. If they are the only two companies in the country.e. But by distributing the reductions over the country’s entire private sector. save $ 25. or ‘allowances’. So company B also saves $ 25. rather than selling them. 3 |Page . The government wants to cut their emissions by 5 per cent. Each company must either reduce its emissions by 5. Emissions Trading Emissions’ trading is also sometimes called ‘cap-and-trade’. So it’s reasonable for it to cut its emissions by 10. Trading in project-based credits Often the two categories are put together in hybrid trading systems.000 on the deal. A and B.000 tones: if it sells the extra 5. Cutting each tonne of emissions costs it $ 15. it costs the sector as a whole $ 50. So it decides not to reduce its emissions. are being agreed upon. this means the country’s business sector winds up cutting emissions just as much as it would have under ordinary regulation. Emissions trading.000.000 tones of allowances from someone else. The ICBE is anticipating this market and documenting RE systems and the emissions they reduce. but instead to buy the 5.000 over what they would have had to spend without trading.. in short. to emit 95.000 less to do so. i. which will allow for more permits to enter the system. normally cap and trade systems will not include mechanisms such as the CDM. Company A can reduce its emissions for half this cost per tonne.

due to low labour costs. it’s not worthwhile for company A to make any cuts at all. a plethora of ‘dirty’ factories. Unfortunately for company A. Not only is it difficult to try to create credible ‘credits’ and make them equivalent to ‘allowances’. Mixing the two also changes the economics.000 tonnes. Such systems are enormously complex. burning methane seeping out of a coal mine or waste dump so that it doesn’t escape to the atmosphere. or building a wind power generator. or buying credits from abroad. If company B can save $ 5.000 tonnes of carbon dioxide a year. so it gives each company allowances to emit only 95. it can’t find any such buyer. And. and try to make ‘allowances’ exchangeable for project-based ‘credits’. it makes sense for both company A and company B to buy credits from abroad rather than make reductions themselves. How big is the market today? Exact figures are hard to come by because the market is still fairly new. But now the government tells each company that if it doesn’t want to cut its emissions by 5. The price of credits from such projects is only $ 4 per tone. the best option would be. to buy $ 20.Trading in project-based credits Suppose there are two companies.000 allowances it would have to spare. The US sulphur dioxide market uses emissions trading only. Company A saves $ 5. Company B meanwhile saves $ 55.000 tonnes each. since data is not easily available and since several different schemes exist. Hybrid systems use both emissions trading and ‘off set’ trading. Hybrid trading systems Some pollution trading systems use emissions trading only. For example. not all directly comparable.000. (CarbonTrading. and government and World Bank subsidies covering part of the costs of building the projects and calculating how much carbon dioxide equivalent* they save.000. But both the Kyoto Protocol and the EU Emissions Trading System mix ‘cap-and-trade’ allowances and projectbased credits. and try to make them mutually exchangeable. The World Bank.’Made in USA’-A Short History Of Carbon Trading) For company A. it wouldn’t have to spend anything. But company B is the only other firm in the emissions trading scheme. 2006. The total saving for the domestic private sector is $ 60. it won’t buy company A’s spare allowances. it has another option. For company B. Instead of having to pay $ 20.000 by going abroad for credits. and it too will wind up buying credits overseas. installing machinery at a chemical factory to destroy greenhouse gases. A and B. each emitting 100. 4 |Page . the best option would be to cut its own emissions by 10.000 to reduce its own emissions.000 tonnes ‘below what would have happened otherwise’. It can invest abroad in projects that ‘reduce’ emissions of carbon dioxide 5.000 for carbon credits from abroad.000 worth of credits abroad rather than spend $ 75.000 tones – but only if it could find a buyer who would pay $ 10 per ton for the 5. again. Such projects might include growing crops to produce biofuels that can be used instead of oil.Other names for project-based credit trading include ‘baseline-and-credit’ trading and ‘off set’ trading. trading allowances with each other. the government wants to cut their emissions by 5 per cent.000 by buying credits from projects abroad rather than cutting its own emissions. imagine that company A and company B above are allowed three options in any combination: cutting their own emissions. In this situation. So without company B as a buyer.

renewable energy generation. 4. The Bank believes the carbon market has the potential to bring more than $25bn (£14bn) in new financing for sustainable development to the poorest countries and the developing world. 2. the opportunity to generate income from activities that previously attracted no additional revenue. greenhouse friendly fuels and carbon sequestration. particularly as the market becomes more liquid and active. 3. The share of volume of emission reductions purchased by various countries from January 2004 to April 2005 confirming that most of the CDM demand is from the EU and Japan. and assuming that all carbon certificate products are of the main players in carbon financing. meaning that they are equivalent ways of addressing emission reduction. and employment and wealth creation in rural areas. the reduction in overall cost of meeting emission reduction targets. biodiversity enhancement. such as investment in emission reduction. (United Nations Conference on Trade and Development. the progressively improved definition of a "price" for carbon. World Bank study of the carbon market The World Bank Study for the International Emission Trading Association (IETA) indicates the project-based emissions traded are rapidly increasing. 5 |Page . estimates the value of carbon traded in 2005 to be about $10bn. approaching 107 million tons in 2004. for benefits such as salinity amelioration. Benefits of carbon trading The benefits to the general community of trading emission reduction/offset certificates in a market include 1. as mentioned above. 2006). a 38 per cent increase over the preceding year. the ability to use revenue from carbon sequestration to help fund additional planting of trees and other vegetation. conversion to greenhouse gas friendly fuels and energy.

hence suggesting that Canada might be required to purchase large amounts of outside credits to meet its Kyoto commitment. followed by private firms from the United Kingdom (12%). Another contributing factor might be the fact that many private companies appear to believe that the non-compliance fee under this plan will be no more than 15 Canadian dollar per tonne of CO2e (U. while it is not clear that private demand is growing as fast. however. and for the moment. all located in Asia. Interestingly. however. When purchases by the various funds managed by the World Bank Carbon Finance Business (CFB) are attributed to the CFB. is unclear as demand from Governments (as expressed. 2005) Carbon Seller: The largest seller of ERs is Asia (45% from January 2004 to April 2005). 2003 –Dec. Latin America is by far the largest supplier of ERs from projects other than HFC23 destruction (46%). The share of the volume purchased by Canadian private and public entities has remained small (5% between January 2004 and April 2005). which include both JI projects in New Zealand and voluntary activities in the U. Simply.Carbon Buyers European buyers now represent the bulk of the purchases of emission reductions with a combined 60% of total volume purchased between January 2004 and April 2005. for instance. Latin America is second with 35% of the volume supplied. All other European purchasers combined account for 32% of the total volume purchased. shares of purchases by all major groups diminish as part of their volume is now attributed to the CFB. Precisely. the Government of the Netherlands (through its various agencies and intermediaries except the CFB (Senter. This figure can appear surprising since GHG emissions of Canada were 20% higher than their 1990 levels in2002. and Austria). but compliance with the EU ETS. against one-third by governments (mostly The Netherlands. And the same is true overall: private entities represent about two-thirds (69%) of total purchases of emission reductions. These aggregate figures. 2004 – April. before the CFB itself (22%) and Japanese entities (16%). The share of Japan (mostly private Japanese entities) has diminished from 29% (Jan. the International Finance Corporation. (IETA. a figure sufficiently modest to raise questions as to whether the transaction costs associated with CDM and JI are worth the effort. Denmark. European entities represent 44% of the purchases from January 2004 to May 2005..S. We have only anecdotal evidence about the motivations for the transactions by private European firms. while transition economies rank fourth at 6%.S. In fact. two-thirds of the volume purchased from Europe was purchased by private firms. European Bank on Reconstruction and Development. while the target for the country under the Kyoto Protocol is –6% relative to 1990 levels. and programs established within Rabobank. appears to be a key driver. 2004) to 21% (Jan. to our knowledge at least.$12 at exchange rate prevailing at time of writing). Within this group. and that there is yet no clarity on allowance allocations to individual firms. Sweden. are strongly influenced by the dynamics of HFC23 destruction projects. and not to the funds’ participants. 6 |Page . and the Corporation Andina de Fomento) is the largest single buyer with 16%. 2005). both within the pilot phase and during the first commitment period. in Government purchase tenders and funds) is growing rapidly. Whether this trend will continue. which are few in number but very large in volume. the picture is slightly not very different. The limited involvement of the Canadian private sector in transactions so far can probably be attributed to the fact that Canada’s climate change plan has only recently been announced. Projects in OECD countries. rank third with 14%.

Emerging countries in the carbon market are China. India is by far the single largest supplier of emission reductions. 7 |Page . which is reflected. 2005). India maintains that the major responsibility of curbing emission rests with the developed countries. and the top five (which include also Bulgaria and Romania) account for nearly 70%. and thus not reflected in the above figures. CRABON TRADING IN INDIA India signed and ratified the Protocol in August. Most of these projects. This result might come as a surprise to observers of the carbon market. Since India is exempted from the framework of the treaty. inter alia. it is expected to gain from the protocol in terms of transfer of technology and related foreign investments. unilateral CDM projects (60 to 70 at least in India) are not included in our database of transactions. where projects are now being accepted by the DNA. in many of the methodologies submitted to the CDM Executive Board.e. and Mexico. As can be seen in Figure 3. Following the principle of common but differentiated responsibility. the market seems to be concentrating in large. against 28% from Jan.. (IETA. middle-income countries. As long as no credit is sold. Brazil and Chile) account for 58% of the total volume delivered over that period. are intended to be unilateral CDM. and is lower than Latin America’s. 2004 to April 2005. and unilateral CDM notwithstanding. Indian Prime Minister Manmohan Singh pointed out that the per-capita emission rates of the developing countries are a tiny fraction of those in the developed world. This concentration of CDM flows towards large middle-income countries is consistent with the current direction of Foreign Direct Investment. projects that are implemented without an Annex I participant. which has also seen large volumes transacted in the past 12 months. considering the very large flow of projects approved by the Indian DNA. i. which have accumulated emissions over a long period of time. The three largest suppliers (again India. In terms of trends. 2003 to Dec. 2004). At the G-8 meeting in June 2005. however. 2002.Asia’s share of non HFC-based ERs is stable (28% from Jan. Most of the new volume is going to India and Brazil.

Director General of CIFOR. "This would bring social. "Healthy forests bring all kinds of other benefits too. Several favorable enabling factors have contributed to India’s preeminent position in the CDM market such as a good technical base and a pro-active National CDM authority. 8 |Page . many community-based projects can sell carbon credits at the expected global market price of US$15 to $20 per ton of sequestered carbon. rubber."(Joyotee Smith)."(Scherr. "Community tree planting efforts have always been thought of as too costly and risky for businesses.Carbon trading allows industries in developed countries to offset their emissions of carbon dioxide by investing in reforestation and clean energy projects in developing countries. 25 in energy efficiency. fruits. non-conventional energy sources and power.C. Of these 80 projects. and local environmental benefits to hundreds of thousands. 44 are in renewable energy. of poor rural people in the developing world. If there are other economic uses of the reforested land. "Communities can use carbon payments to finance sustainable tree-growing investments that produce these non-carbon benefits. 2002). 80 projects were approved by the National CDM Authority. India is expected to capture between 20 and 30 per cent of the CDM market. such as producing fuel wood. 5 each in fuel switching and industrial processes. economic. 2002). "However. "In this situation. and potentially millions. These projects are then submitted to the UNFCCC’s Executive Board for validation and registration. and 1 in municipal solid waste. far more than in any other country during the same period. D. they would help to protect endangered floras and faunas. bringing in up to $300 million in revenue. Carbon projects could potentially recover habitat on millions of hectares of heavily populated forest and farmlands. and food crops.-based Forest Trends). Senior Policy Analyst at the Washington. The Ministry of Environment and Forests deals with the climate change and CDM issues in India." "Problems with forest carbon arise when trees are being grown solely for their carbon. which includes secretaries from ministries such as finance. then the cost of carbon sequestration is lower. (Sara Scherr et al. Over the eighteen-month period from January 2004 to June 2005. The deals between industry and community tree growers may be one of the least expensive ways for companies to off-set their carbon emissions." (David Kaimowitz."(Scherr).  9 |Page .com  www.BIBILOGRAPHY  www.asp  www.

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