Carbon Emission Trade

Carbon trade is the buying and selling of credits that permit a company or other entity to emit a certain amount of carbon dioxide. The carbon credits and the carbon trade are authorized by governments with the goal of gradually reducing overall carbon emissions and mitigating their contribution to climate change.

Carbon trading is also referred to as carbon emissions trading.

In July 2021, China started a long-awaited national emissions-trading program.1 The program will initially involve 2,225 companies in the power sector and is designed to help the country reach its goal of achieving carbon neutrality by 2060. It will be the world’s largest carbon market. That made the European Union Emissions Trading System the world’s second-largest carbon trade market.

Carbon trade agreements allow for the sale of credits to emit carbon dioxide between nations as part of an international agreement aimed at gradually reducing total emissions.

The carbon trade originated with the Kyoto Protocol, a United Nations treaty that set the goal of reducing global carbon emissions and mitigating climate change starting in 2005.

Various countries and territories have started carbon trading programs—for example, in July 2021, China started a national emissions-trading program.

Cap and trade, a variation on carbon trade, allows for the sale of emission credits between companies.

These measures are aimed at reducing the effects of global warming but their effectiveness remains a matter of debate.

The carbon trade originated with the Kyoto Protocol, a United Nations treaty that set the goal of reducing global carbon emissions and mitigating climate change starting in 2005. At the time, the measure devised was intended to reduce overall carbon dioxide emissions to roughly 5% below 1990 levels by 2012. The Kyoto Protocol achieved mixed results and an extension to its terms has not yet been ratified

The notion is to incentivize each nation to cut back on its carbon emissions in order to have leftover permits to sell. The bigger, wealthier nations effectively subsidize the efforts of poorer, higher-polluting nations by buying their credits. But over time, those wealthier nations reduce their emissions so that they don’t need to buy as many on the market.

When countries use fossil fuels and produce carbon dioxide, they do not pay for the implications of burning those fossil fuels directly. There are some costs that they incur, like the price of the fuel itself, but there are other costs not included in the price of the fuel. These are known as externalities. In the case of fossil fuel usage, often these externalities are negative externalities, meaning that the consumption of the product has negative effects on third parties.

Proponents of the carbon trade argue that it is a cost-effective partial solution to the problem of climate change and that it incentivizes the adoption of innovative technologies.

However, carbon emissions trading has been widely and increasingly criticized. It is sometimes seen as a distraction, and a half-measure to solve the large and pressing issue of global warming.

Despite this criticism, carbon trading remains a central concept in many proposals to mitigate or reduce climate change and global warming.

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