Carbon emission trading

Carbon emissions trading is a form of emissions trading that specifically targets carbon dioxide (calculated in tonnes of carbon dioxide equivalent or tCO₂e) and it currently constitutes the bulk of emissions trading.

This form of permit trading is a common method countries utilize in order to meet their obligations specified by the Kyoto Protocol; namely the reduction of carbon emissions in an attempt to reduce (mitigate) future climate change.

Under Carbon trading, a country having more emissions of carbon is able to purchase the right to emit more and the country having less emission trades the right to emit carbon to other countries. More carbon emitting countries, by this way try to keep the limit of carbon emission specified to them.

Economics

Emissions trading works by setting a quantitative limit on the emissions produced by emitters. The economic basis for emissions trading is linked to the concept of property rights (Goldemberg et al.., 1996, p. 29).

Costs and valuation

Greenhouse gas

A greenhouse gas (sometimes abbreviated GHG) is a gas in an atmosphere that absorbs and emits radiation within the thermal infrared range. This process is the fundamental cause of the greenhouse effect. The primary greenhouse gases in Earth's atmosphere are water vapor, carbon dioxide, methane, nitrous oxide, and ozone. Without greenhouse gases, the average temperature of Earth's surface would be about 15 °C (27 °F) colder than the present average of 14 °C (57 °F). In the Solar System, the atmospheres of Venus, Mars and Titan also contain gases that cause a greenhouse effect.

Human activities since the beginning of the Industrial Revolution (taken as the year 1750) have produced a 40% increase in the atmospheric concentration of carbon dioxide, from 280 ppm in 1750 to 400 ppm in 2015. This increase has occurred despite the uptake of a large portion of the emissions by various natural "sinks" involved in the carbon cycle.Anthropogenic carbon dioxide (CO₂) emissions (i.e. emissions produced by human activities) come from combustion of carbon-based fuels, principally coal, oil, and natural gas, along with deforestation and soil erosion.

Emissions trading

Emissions trading or cap and trade is a government-mandated, market-based approach to controlling pollution by providing economic incentives for achieving reductions in the emissions of pollutants. Various countries, states and groups of companies have adopted such trading systems, notably for mitigating climate change.

A central authority (usually a governmental body) allocates or sells a limited number of permits to discharge specific quantities of a specific pollutant per time period. Polluters are required to hold permits in amount equal to their emissions. Polluters that want to increase their emissions must buy permits from others willing to sell them.Financial derivatives of permits can also be traded on secondary markets.

In theory, polluters who can reduce emissions most cheaply will do so, achieving the emission reduction at the lowest cost to society. Cap and trade is meant to provide the private sector with the flexibility required to reduce emissions while stimulating technological innovation and economic growth.