Carbon trading is a system designed to limit climate change by creating a market with limited allowances for emissions. It is a type of emission trading scheme designed for carbon dioxide (CO2) and other greenhouse gases (GHG) . Carbon trading is also referred to as carbon emissions trading. Here are some key points about carbon trading:
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Purpose: The purpose of carbon trading is to gradually reduce overall carbon emissions and mitigate their contribution to climate change.
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How it works: Carbon trade agreements allow for the sale of carbon credits in order to reduce total emissions. Companies or individuals can use carbon markets to compensate for their greenhouse gas emissions by purchasing carbon credits from entities that remove or reduce greenhouse gas emissions. One tradable carbon credit equals one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, sequestered or avoided.
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Types of carbon markets: There are broadly two types of carbon markets: compliance and voluntary. Compliance markets are created as a result of any national, regional and/or international policy or regulatory requirement. Voluntary carbon markets – national and international – refer to the issuance, buying and selling of carbon credits, on a voluntary basis.
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Effectiveness: Carbon trading is based on the cap and trade regulations that successfully reduced sulfur pollution during the 1990s. Proponents of the framework say that it creates financial incentives for firms to reduce emissions, whilst lowering the overall cost of these reductions as the cheapest improvements are made first. However, its effectiveness remains a matter of debate.
Carbon trading has been criticized as a form of colonialism, in which rich countries maintain their levels of consumption while getting credit for carbon savings in inefficient industrial projects. Nations that have fewer financial resources may find that they cannot afford the permits necessary for developing an industrial infrastructure, thus inhibiting these countries economic development.
