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Pay or get paid for GHGs
Carbon emission trading is not only catching up, but also reducing after-affects of trade
The ever growing concerns among environmentalists and policy makers to curtail pollution along with keeping the economies growing, have given birth to the concept of emission trading. With the world getting more and more business-like, day by day, this carbon emission trading makes more sense than other similar measures.
Clubbed with this, increasing acceptance by countries of Kyoto Protocol and growing social responsibility, this trading scheme is most likely to take shape of a multibillion-dollar industry.
This system entails the member, company or country, to meet their carbon emission targets. The members are actually countries (as in the case of the Kyoto Protocol), or companies (as in the case of a domestic trading system). The countries or companies have to buy units (credits) in order to emit pollutants above their set targets, or even may sell units if they emit pollutants below their set targets. The Clean Development Mechanism (CDM) under the Kyoto Protocol allows industries in developing countries to create emission credits (units).
In simple words, carbon credits are nothing but an equivalent to one tonne of carbon dioxide or its equivalent Greenhouse Gas (GHG). A limit is prescribed to the amount of greenhouse gases a firm can let out in the atmosphere.
The carbon credits are “Entitlement Certificates” issued by the United Nations Framework Convention on Climate Change (UNFCCC) to the implementers of the approved CDM projects. These credits/units can be marketed at both domestic and international level. Under a typical emissions trading scheme, industries are issued an allowance for emissions up to a mandated cap. If the industry uses only a partial allowance, the rest can be sold to other industries.
The initial allocation or the capping is based on traditional provision where the capping or emitting provision is decided on basis of its trend of emissions. Moreover, the national budget for environment is left to be spent on environmental activities and further can be invested to earn credits by reducing the national pollution level. The emission trading can fructify to best results when, a safety valve is applied to it. This system has an emission cap, with tradeable permit but the maximum (or minimum) trading price is fixed. Thus, the emitters Inc. is left with choice of either trading their credits/units in the market or purchasing them from the government without charging prices beyond the permissible limits (safety valve). Consider this: According to the World Bank’s Carbon Finance Unit, 374 million metric tonnes of carbon dioxide equivalent were exchanged through projects in 2005, a 240% increase, relative to 2004. What’s more, the size of this market is estimated to be anything between $40 billion and $100 billion by 2010.
The current size of the emissions-related trading market is small globally but it is expanding by leaps and bounds. As per reports by the World Bank (May 2006), the emission trading market is worth about $30 billion for 2006, but the market size is growing exponentially.
The EU-ETS (European Union-Emission Trading Scheme) is a trading scheme using the cap and trading scheme, the UK’s Climate Change Levy is a price system using a direct carbon tax and China uses the CO2 market price for funding of its Clean Development Mechanism projects with the safety valve clause.
By:- Sray Agarwal
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