Carbon Trading – College Essay Example

take various forms such as economic instruments, government funding and regulation. One effective instrument is a tradable permit system that has demonstrated positive environmental outcomes when there is a predictable initial allocation mechanism and sustained pricing in place particularly within industrial sectors. This approach was formalized by international agreement with over 170 countries through the Kyoto Protocol while its market mechanisms were established via the Marrakesh Accords mirroring the successful US Acid Rain Program which reduced industrial pollutants.

In the mid-1980s, climate change became a political priority due to scientific evidence of human interference in the global climate system and increased public concern for the environment. The Intergovernmental Panel on Climate Change (IPCC) was established in 1988 by the United Nations Environment Programme (UNEP) and the World Meteorological Organization (WMO). The IPCC provided policymakers with reliable scientific information on climate change impacts. Its first report in 1990 warned that without emissions limitation actions, Green House Gases accumulation would cause additional warming of Earth's surface by the next century. In response to this need for global climate protection, negotiations were launched resulting in completing the United Nations Framework Convention on Climate Change (UNFCCC) in May 1992. This convention was signed by 154 states and European Community at the Earth Summit held in Rio de Janeiro during June 1992. India also signed and ratified this treaty respectively during 1992 and 1993. Moreover, under Kyoto Protocol, emission quotas for developed Annex I countries are referred to as Assigned Amounts which are listed in Annex B; their initial assigned amount is denominated in Assigned amount units (AAUs), each permitting a metric tonne of carbon dioxide equivalent emissions.The UNFCCC manages quotas

for carbon emissions through national registries, ensuring compliance from operators who receive allowances in the form of credits for emitting one metric tonne of CO2 or its equivalent greenhouse gas. Operators may sell unused credits while businesses can purchase them if approaching their quotas. This approach grants flexibility to industries in planning and meeting energy demand by allowing operators to find cost-effective methods to reduce emissions, such as investing in clean machinery or purchasing excess capacity from other operators. The European Union has adopted the Kyoto mechanism since 2005 under the Emissions Trading Scheme with validation authority from the European Commission, requiring EU participants to trade six significant anthropogenic greenhouse gases with developed countries that ratified Annex I. Similar schemes are being considered by countries like Australia and the US who have not ratified Kyoto. These flexible mechanisms aim to limit emissions while accommodating global progress and development.The Kyoto Protocol was a signed agreement by countries that aimed to reduce carbon emissions and other greenhouse gases, such as ozone, carbon dioxide, methane, nitrous oxide, and water vapor. The system allowed countries emitting more of these gases to reduce their levels voluntarily to those of the early 1990s. To meet new emissions standards from 2008-2012, developed European countries agreed to decrease emissions by adopting or improving technology and collaborating with developing nations in setting up eco-friendly technologies that can earn credits for companies or nations. Developing countries like India and China have lower emissions standards for farming or factories, giving them an advantage while learning about standard emission levels through organizations like the United Nations Framework Convention on Climate Change. Carbon credits were earned when companies

emitted less than the UNFCCC's standard level of carbon emissions; European companies mostly purchased these credits since the United States is not a signatory to the Kyoto Protocol.A tradable credit can refer to an emissions allowance or assigned amount unit, which is allocated or auctioned by national administrators in a Kyoto-compliant cap-and-trade scheme. Alternatively, it can be an emission offset. The offsetting and mitigating activities may occur in any developing country that has ratified the Kyoto Protocol and validated their carbon project through one of the UNFCCC's approved mechanisms. Once authorized, these units are called Certified Emission Reductions (CERs). These projects may be credited and constructed before the trading period under the Protocol's provisions. Its primary objective is to decrease greenhouse gas emissions while increasing uptake by natural sinks with specific goals and deadlines for achievement. Flexibility and binding measures work together to achieve these objectives by encouraging practical and cost-effective ways of doing so. Developed countries have three options for obtaining greenhouse gas reduction credits from the Kyoto Protocol: Joint Implementation (JI), Clean Development Mechanism (CDM), or International Emissions Trading (IET). JI enables developed countries with high domestic greenhouse reduction costs to establish a project in another developed country, such as changing from wet to dry processing at a Ukrainian cement factory that reduced energy consumption by 53 percent between 2008-2012.During the same period, a Bulgarian hydropower project underwent rehabilitation which led to the reduction of C02 equivalent emissions by 267,000 tons. The Clean Development Mechanism (CDM) is responsible for allowing developed countries to sponsor greenhouse gas reduction projects in developing regions where costs are relatively lower. These projects have a global atmospheric impact

that is equivalent, and the sponsoring country receives credits towards achieving emission reduction targets while the developing country gains capital investment, improved land use or clean technology. Before an investing country can register and implement a CDM project, it must first obtain approval from the designated national authority in the host country and establish baselines. A third-party agency known as a Designated Operational Entity (DOE) then validates these projects before they are registered by the Executive Body of CDM, issuing carbon credits called Certified Emission Reductions (CERs). Each unit of CER issued has equivalence to reducing one metric tonne of C02 or its equivalent. As at March 14th, 2010 more than four thousand two hundred such projects were ongoing. One crucial aspect of any Clean Development Mechanism (CDM) project is "additionality" which involves demonstrating that planned carbon reductions would not have occurred without implementing such development in developing countries by industrialized nations earning carbon credits from them.The process of determining carbon credits involves establishing a baseline emission level, which represents emissions that would have occurred without the project. The credit is calculated by subtracting this baseline from the lower emission level achieved through the project. However, there is concern about "false Credits" if a project does not offer additionality and emissions would have decreased regardless. International Emissions Trading allows countries to trade in the international carbon credit market to compensate for their shortfall in Assigned Amount Units. Countries can also trade surplus carbon units with others exceeding their emission targets under Annex B of the Kyoto Protocol. Carbon projects can be initiated by national governments or in-country operators, but most transactions occur via operators with

quotas set by the country. By assigning a monetary value to pollution, carbon credits establish a market for reducing greenhouse gas emissions and make them an internal cost of business reflected on balance sheets alongside other assets and liabilities. For instance, if a factory produces 100,000 tonnes of greenhouse gas emissions annually within an Annex I country, it may face an imposed quota of 80,000 tonnes.The factory has two options: decrease its emissions to meet the quota or buy carbon credits from approved organizations on the open market. Purchasing credits may be a more feasible option for businesses unable to reduce their emissions. When manufacturing alternative energy sources, it's important to consider the energy consumption and emissions during transportation. One way to offset emissions is by investing in projects that reduce greenhouse gases in developing countries, such as recovering methane from swine farms for power stations. Another possibility is buying allowances from sellers who invested in low-emission machinery, which can subsidize costs of new equipment and ensure compliance with both parties submitting emission accounts. The Kyoto Protocol signatories chose carbon credits over carbon taxes because of their advantages and disadvantages, whereas tax-raising schemes may not be effective for governments. Carbon trading has opponents claiming it creates an unregulated market but proponents argue that treating emissions as a commodity makes it easier for businesses to manage their activities.Advocates of the Kyoto Protocol believe that its adaptable mechanisms guarantee investments are directed towards sustainable carbon reduction initiatives, verified through an internationally accepted process. Carbon trading is considered by some supporters to be more reliable in achieving emission reductions than a tax, which may fluctuate over time. Furthermore,

it offers a system for rewarding environmentally-friendly activities like tree-planting. Conversely, proponents of a carbon tax argue that it presents less complexity and lower costs in implementation for markets such as gasoline or home heating oil. Additionally, it could reduce the risk of fraudulent activity despite requiring emission verification under both credits and taxes. The use of proportional credits based on past emissions can also encourage companies to improve their efficiency before establishing baselines but grandfathered credits may disadvantage new or growing businesses compared to established ones. Government regulation stabilizes the value of carbon, protecting against market fluctuations and weak investor interest. The principle of Supplementarity prioritizes internal emission abatement before purchasing carbon while capped entities can develop measurable and permanent emissions reductions outside the cap sectorally.The complexity of verifying reductions in CO2-equivalent greenhouse gas emissions is a common critique of carbon credits. The legitimacy of a carbon project's impact on permanent emissions reduction is determined by understanding the CDM methodology process. Project sponsors submit emission reduction creation concepts to the Designated Operational Entity (DOE), which are then reviewed by the CDM Executive Board, the CDM Methodology Panel, and their expert advisors to determine if they result in additional reductions. Carbon credit offsets must demonstrate additionality to prove that revenue from carbon credits was necessary for the project's implementation and would not have occurred otherwise. Non-additional projects, which are already profitable or mandated by regulations, require specialist review for full determination of additionality. To ensure environmental preservation claims resulting from carbon credit retirement are credible, voluntary carbon offset initiatives widely accept demonstrating additionality as crucial. GHG emission trading programs limit emissions for specific facilities or

sources and issue tradable "offset credits" for GHG reductions led by projects outside of program coverage according to the World Resources Institute/World Business Council for Sustainable Development (WRI/WBCSD).The aim of offset credits is to enable capped emissions facilities to emit more in direct correlation with represented 3HG reductions, achieving a balanced net increase in GHG emissions. However, if offset credits are issued for GHG reductions achieved by projects that would have happened regardless of the existence of a 3HG program, it can result in a positive net increase in GHG emissions and prevent the emission goal. Thus, additionality is crucial for the sustainability and honesty of 3HG programs recognizing project-based GHG reductions. The Kyoto mechanism is globally accepted for regulating carbon credit activities and includes measures to verify additionality and overall effectiveness. The UNFCCC supports this mechanism but only has worldwide mandate for evaluating emission control systems from 2008-2012. As EIJ ETS system began before this mandate, its continuation into a third phase is expected to coincide with any new international agreement as business investment spans over decades.The negotiations surrounding greenhouse gas emissions after the Kyoto Protocol are causing uncertainty and increasing risk for businesses due to the unpredictability of agreements. Additionally, certain countries like the USA, Australia, and China have refused mandatory carbon emission caps, putting companies in capped nations at a disadvantage as they now directly pay for their carbon costs. It's crucial that national quotas represent genuine decreases in emissions output to ensure an overall reduction in emissions and fair distribution of costs within the cap and trade system. However, some governments in capped countries have weakened their commitments by implementing late

or weak National Allocation Plans. The grandfathering of allowances has also been criticized for hindering new market entrants and giving incumbents windfall profits through passing on emission charges to customers. To address these issues, the EIJ ETS's second phase joining with Kyoto will likely see more auctioned allowances and a more precise carbon market price introduced.The continuous increase in energy use and emissions levels, if not addressed, will lead to a higher demand for carbon credits by companies. As a result, market prices may rise due to supply and demand, which could encourage environmentally-friendly activities that generate carbon credits. However, there may be differences in the market value of individual allowances such as AAUs or EUAs compared to offsets like CERs because of the lack of a developed secondary market and pricing difficulties. The principle of supplementarity and its lifetime also pose questions about the effectiveness of offsets generated by a carbon project under the Clean Development Mechanism for EIJ ETS operators.

To limit greenhouse gas emissions effectively, Yale University economics professor Nilliam Nordhaus suggests that high-carbon goods and services should be used sparingly. He argues that the price of carbon needs to be high enough to motivate changes in behavior and production systems so that inventors can develop low-carbon products and processes that replace current technologies. A high carbon price provides signals to producers about the carbon content of inputs while inducing substitutions with low-carbon options. It has the potential to economize on information necessary for these tasks.A harmonized carbon tax can enable ethical consumers to accurately calculate their carbon footprint by raising the price of products according to their carbon content. This tax would

proportionally increase the cost of goods based on their carbon emissions throughout production, resulting in an automatic calculation of the product's "carbon footprint". Nordhaus suggests that an optimal price for carbon is around $30 per ton, which should increase with inflation based on social costs associated with carbon emissions. While consumers may not be aware of the exact amount attributed to carbon emissions, they contribute to the social cost of their actions. To balance incremental costs and benefits associated with reducing climate damages, establishing an optimal market price or carbon tax is crucial. A country imposing a $30 per ton tax on carbon could expect gasoline taxes to increase by approximately 9 cents per gallon and coal-generated electricity taxes by about 1 cent per kWh - roughly 10% of current retail prices. This tax would generate around $50 billion annually assuming current levels of US-based carbon emissions.Companies can partner with their subsidiaries in different countries to obtain "carbon credits" by implementing eco-friendly policies, as part of the Clean Development Mechanism scheme. This allows companies to collaborate and transfer technology, such as Indian Oil working with others in the open market. Audits will evaluate emissions reduction efforts starting December 2008. China and India are adopting energy-saving technologies to earn more carbon credits which they sell to European counterparts, creating a market for these credits. By 2012, European companies must meet certain carbon emission standards and carbon credit deals are expected over the next five years. To ensure safe trading of carbon credits, Bluenext has announced the Safe Harbour initiative while Commodity Exchange Bratislava established the Suspicious Carbon Credits Registry. Companies who adopt new technologies and save

credits can profit from selling them on platforms like MCX's process of trading carbon credits. Despite having access to new technologies, some companies did not apply for credits but others use management consultancies to improve their bottom line by reducing their carbon emissions through environmentally friendly plans.These consultancies aid in the search for buyers for carbon credits, which are sold through bilateral deals. The price of these credits was previously around ˆ15 per tonne of carbon, but has now increased to around ˆ22 per tonne and is traded on the European Climate Exchange. Additionally, MCX, an Indian futures exchange, began trading carbon credits to boost profits for companies with lower carbon emissions. Our exchange serves only Indian individuals and businesses who can choose whether to hold onto their accumulated carbon credits or sell them now. Contracts for delivery of carbon credits expire annually in December. The absence of fixed norms or regulations from the Indian government means that only Indian companies meeting UNFCCC standards and utilizing new technologies are eligible to sell carbon credits after undergoing audits. Financial investors purchase from Indians anticipating an increase in demand if European emission reduction targets remain unmet by 2009, 2010, or 2012. High-energy consuming power, energy and metal companies on MCX require better technology to emit less carbon in order to receive favorable prices for their credit sales.The market may be attractive to small investors as prices are expected to strengthen upon the expiration of contracts in December.