Carbon Trading

Carbon trading is an approach used to control carbon dioxide pollution by providing economic incentives for achieving emissions reductions. The use of market mechanisms, in the form of carbon trading, has emerged as a key narrative in the international response to climate change formalized in the United Nations Convention on Climate Change (UNFCCC) and the 1997 Kyoto Protocol. Carbon trading was first proposed to the Second Conference of the Parties (COP) of the UNFCCC in 1996  and was later enshrined in the CDM of the Kyoto protocol of 1997.

There are two main forms that carbon trading takes: ‘cap and trade’ and offsetting. Under cap and trade schemes, governments or intergovernmental bodies set an overall legal limit on emissions in a certain time period (‘a cap’) and then grant industries a certain number of licenses to pollute (‘carbon permits’ or ‘emissions allowances’). Companies that do not meet their cap can buy permits from others.

Carbon offsets are based on ‘emissions-saving projects’ that are created to ‘compensate’ for continued pollution in industrialized countries in the North. Offsets’ under the Kyoto A protocol is referred to as emissions reductions not covered by the cap in an ETS. Pollution continues at one location and equivalent emissions saving or increasing the capacity such as sink (such as forests or soils) will happen elsewhere beyond ‘business as usual’. Offsets are also now widely traded outside the Kyoto-compliance market, including by individuals and firms voluntarily aiming to offset their GHG emissions.

Under Kyoto offset projects fall under either the Clean Development Mechanism (CDM) or Joint Implementation (JI) and create credits called certified emission reduction (CER) and emission reduction unit (ERU) respectively. Currently CDM projects are the major source of Kyoto offsets and occur in industrially developing countries falling outside any Kyoto emissions limits.

JI refers to projects based in industrialized countries, typically Eastern Europe. Kyoto offsets support industrialized countries with greater flexibility in meeting their caps whilst achieving sustainable development and are also referred to as ‘flexibility mechanisms’. These offsets do not require a polluting source to reduce its emissions, but instead, allow them to increase emissions and offset them elsewhere. They could just as sensibly be called certified ‘emission increase’ units.

Growing trees are important components for carbon trading which happens under the Clean Development Mechanism (CDM) established under the Kyoto Protocol United Nations Framework Convention on Climate Change (UNFCCC). Carbon trading allows developed countries to offset some of their carbon emissions by investing in climate-friendly projects, such as tree planting under forestry CDM projects, in developing countries.

While net global emissions reductions should occur for source offset, where sink offsets are involved the total scale of systemic GHG cycling will be expanded (e.g. via more sources justified by more sinks). Such a process seriously risks further enhancing the Greenhouse Effect.

Offsets also have several problems as following. The amount of carbon emitted by the source is not always equivalent to the amount of carbon offset by the sinks. The amount of carbon sequestration in trees and soils varies greatly depending on the local environmental conditions, skills of foresters, management practices and enforcement of regulations. Forestry can also be subjected to disturbance and soil erosion resulting release of the stored carbon.