Carbon trading is the process of buying and selling permits and credits that allow the permit holder to emit carbon dioxide. It has been a central pillar of the EU’s efforts to slow climate change.
The world’s biggest carbon trading system is the European Union Emissions Trading System (EU ETS). It is beset with problems and corruption and yet countries such as Brazil and China continue to pursue carbon trading as a way to tackle rising emissions.
How do carbon trading permits work?
The model used in all current carbon trading schemes is called ‘cap and trade’. In a ‘cap and trade’ scheme, a government or intergovernmental body sets an overall legal limit on emissions (the cap) over a specific period of time, and grants a fixed number of permits to those releasing the emissions. A polluter must hold enough permits to cover the emissions it releases. Each permit in the existing carbon trading schemes is considered equivalent to one tonne of carbon dioxide equivalent (CO2e). In the theoretical model, (but rarely in practice) permits are to be sold – usually by auction – so that from the outset, polluters are forced to put a price on their emissions, and are incentivised to reduce to a bare minimum the permits they seek.
What are offset credits?
Every current and planned carbon ‘cap and trade’ scheme involves offset credits in one form or another. Credits are a supplementary source of permissions to pollute that can be bought in from countries or industries outside the cap, usually in the developing world. Their purchase allows the emitter to exceed the emissions cap by paying someone else somewhere else to reduce their emissions instead. It is important to remember: offsets do not reduce emissions, they merely replace them.
This practice of carbon offsetting has now filtered through into the realm of private individuals, for example by paying extra money when you book a flight to offset your carbon footprint.
Does carbon trading work to reduce emisions?
Carbon trading is increasingly criticised, not least because carbon dioxide emissions in industrialised countries are not declining at the necessary rate to avert catastrophic climate change.
For more information about carbon trading, see Fern’s beginner guide Trading Carbon. How it works and why it's controversial, or the 20 page version, Designed to fail.
Fern and many scientists, economists and NGOs believe that carbon trading is a dangerous distraction from the need to end fossil fuel use and move to a low carbon future. We do not have time to wait for a high price on carbon: we must shift to a low carbon energy, agriculture, transport and industrial world now. The best way to do this is through direct regulation.
Fern’s initial interest in carbon trading came about because trees were seen as a way of offsetting carbon cheaply, while simultaneously providing money to protect trees. What is Biodiversity offsetting? explains why you can never offset carbon by protecting or planting trees. There is also no evidence that carbon trading has lived up to the promise of providing money.
Despite the flaws inherent in pollution trading, the concept continues to appear in proposals to reduce environmental harm. For more information visit our campaign on biodiversity offsetting.
Category: Carbon Trading