Emissions Trading

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A new global "stock market" is emerging. An international and domestic carbon market where emissions units are bought and sold. Emissions trading means putting a price on harmful emissions from goods and services to achieve a reduction of greenhouse gases (GNG). The scheme allows parties to buy and sell permits for emissions or credits for reductions.


Sale and Purchase of Credits

Emission trading takes place when one party, whether it’s a company or government, seeks to reduce its emission and purchases emission credits from another that has reduced its emission below what was targeted.

Every country is allotted a limited amount of carbon credits, which are then made available to individual companies which are then able to sell or buy credits from each other.

If the countries achieve higher level of emission reductions than their targets, then the companies in those countries need not buy additional carbon credits. But, if they emit higher level of GHG, then they have to buy additional carbon credits - in their own country and in developing countries - to meet their emission reduction targets.

Kyoto Protocol Opens New Markets

The Kyoto Protocol has set emission limits on the world’s major economies and individual countries will be set mandatory emission targets which they will be required to meet. Kyoto Protocol is the outcome of a meeting in Kyoto, Japan, on December 1, 1997 in which 160 nations met and agreed to limit their greenhouse gas emissions to the 1990 level.

According to U.N projections, the 36 countries which pledged to cut emissions by 5 percent are set to reduce emissions by 11 percent by 2012. Many countries have gained credits by sponsoring climate-friendly projects in the developing world. Some of these countries are eager to “bank” their credits. Towards this end some national registry systems have been set up under the protocol. Thus has been created a market value for GNG emissions reductions and new markets and investment opportunities have opened up.

Under the Protocol's emissions-trading system, countries earning credits may use them for meeting their own emission limits, may “ bank” them or sell them to other industrialized countries. Read report on an Indian Village which sold carbon credit to the World Bank Indian villages in global carbon trading

Why This Buying and Selling of Emission Credits?

With a price in place on carbon emission companies have a financial incentive to reduce carbon emissions

In its first phase, 2005-2007, the EU emissions trading scheme covered the following industries under CO2 emissions : power generation, oil refineries, coke ovens, iron and steel, cement, lime, glass, ceramics, and pulp and paper. Also included are all combustion plants with a rated thermal input of more than 20MW of capacity.

For certain companies it may not be viable to reach their emission compliance goals through operational changes. They will then reach their goals through purchases. The sellers, who have successfully reduced emission, are financially benefitted by the sale. Emission Reduction Credits (ERCs) are measured in tons per year. A company creates credits when it is successful in reducing certain pollutants over and above the regulatory requirements. A company can generate credits by:

  • Shutting down some of its existing plants and facilities
  • Controlling production which results in reduced emissions
  • Using new technologies which are outside the compliance requirements
  • Preventing pollution

Bearish Market in Trading Feared

The carbon trading market is projected to be $ 100 billion by 2010. But the trading scheme runs the risk of failure in the event of an anticipated crash in carbon credit prices. There are fears that steep fall in the prices of carbon credits over the last two years would make it cheaper for countries to continue polluting and just buy credits.

Reasons for this is traced to EU countries setting unrealistic emissions targets for themselves which most could meet easily thereby bringing the prices down. Furthermore, with credits fast flowing in from China, Russia and the East European countries, the supply of carbon is likely to outstrip demand at a much faster pace.

According to a report compiled by Sir Nicholas Stern for the UK Government, known as the Stern Report, to stabilize the level of CO2 in the atmosphere at manageable levels, carbon emissions "prices of $20, rising to $30, $40 or even $50" are required. But with most EU countries meeting their emissions targets, supply of credit is outstripping demand.

Burden of Global Warming

The period 1991 to 1995 recorded the five consecutive hottest years. Oil and coal combustions are said to have been the major cause of this warming of the atmosphere. Apart from other effects this warming is feared to produce numerous natural disasters like cyclone, hurricanes and floods.

So far the advanced industrial nations have been responsible for causing maximum global warming. But now greenhouse gas emissions of developing countries such as India and China are rapidly growing as they expand their industrial output.

The United Nations in a recent report has said that countries like India and China should not face the same burden of reducing emissions as the developing countries. It stated that these two countries should reduce emissions by 20 percent of the 1990 level by 2050 against 80 percent by the rich nations. There was rise in emissions in the Soviet Union because of the revving up of its economy.

The U.S, which is not a party to the Kyoto protocol, remains the world's leading emitter with 16 percent increased emissions between 1990 and 2005 and a projected 26 percent rise by 2012.

Still a Long Way to Go

NOx and SOx trading schemes in the US have shown that it is possible to reduce emissions under a robust and effective scheme.

In Europe the current greenhouse gas emissions trading schemes aim to cover 45% of the EU’s CO2 and 33 percent of global greenhouse gas emissions. Huge amout of trade in emission shemes are reported to be taking place.

The scheme is also said to be a major influence on the investment decisions of several companies and is a key issue in taking long-term decisions.

Though most EU countries reported meeting their emissions targets, this is estimated to be only 20 percent of global greenhouse gas emission and if climate is to be tackled effective, similar efforts are required worldwide

Need to solve administrative problems

Administrative problems need to be ironed out in order to make the scheme successful worldwide. Major cause of success of the scheme in the EU is attributed to a body like the European Commission.

In many countries governments have been allowed to go soft on emissions allowances on account of lobbying by major industries.

Other Emission Trading Schemes

Early evidence of successful emissions trading is the 1990 US scheme to reduce acid rain causing emissions of Sox. Under this scheme power plant operators were given the option of reducing emissions by choosing the most cost effective means. As a result over 400 power plants were successful in complying with their emission targets and were able to cut acid rain at costs far lower than expected. SOx emissions from these plants were reduced by 30 percent over 1995 to 1997.

Other emission trading schemes currently in operation are

  • US SO2 “Acid Rain” Trading

Began in 1995 Significant emissions reduction with > 30% savings vs. non-flexible methods

  • US NOx Trading Programs

California “RECLAIM” SO2 & NOx, began 1994

Northeastern states, began 1999

Texas began 2002

  • UK ETS

Began in 2002

  • Chicago Climate Exchange

Voluntary GHG trading system; began late 2003

  • EU ETS

Began in 2005


  • UN Human Development Report
  • The "carbon market"
  • Emission Reduction Credit Registry System
  • A Global Warning

See Also