Emissions Trading Explained
A World Class Carbon Market
Surprising to most there are many carbon markets around the world, Thomson Reuters provides a list of existing and proposed markets. They are commonly referred to as Cap And Trade or Emissions Trading Schemes.
A review of carbon markets around the world concluded that the European Emissions Trading Scheme (EU ETS) was a world class example. We currently only use Carbon Emission Credits (CECs) from the EU ETS, but as other carbon markets are implemented around the world these will be considered for inclusion. To understand why the EU ETS is world class we need to explain how it works.
How the EU ETS Works
It is now a legal necessity for a business in the EU ETS to have an emissions credit (sometimes called a permit) for every tonne of carbon dioxide it emits. Figure 1 shows how a carbon emissions credit is bought from a carbon market to account for a tonne of carbon emissions.
Any business that emits carbon dioxide without having the credits to cover those emissions faces severe penalties. They must pay a fine of 100 Euros per tonne of carbon dioxide and are still required to present a carbon credit for the emissions in the following year.
The emissions credits are issued by the European Union in a regulated compliance market. The number of credits issued is limited by a cap that is based on Kyoto targets. The ETS provides a market for businesses to sell or buy credits . See the home of the EU ETS for more detail.
If a business comes up with a way to create its products while producing less carbon dioxide, it may have credits that it no longer needs. It can sell the credits and use the money to fund its investments in low-carbon solutions. They are rewarded for emitting less carbon dioxide.
Who do they sell the credits to? The credits can be sold on the market to some other emitter that does not have enough credits to cover the carbon dioxide it will emit. The credits will still be used to emit carbon dioxide.
Voluntarily cancelling carbon credits
It is here that you intervene. On your behalf, Climakind purchases emissions credits on the market: but then, instead of either using those credits to emit carbon dioxide or selling them to some other business for them to emit carbon, Climakind permanently cancels the credit (Figure 2).
The cap on the number of credits issued means that your purchase has an immediate impact, effectively reducing the 'cap' as the carbon dioxide represented by the cancelled carbon credit can never be emitted! Fewer credits means adds pressure to the price of the remaining credits.
As the cost of emitting carbon dioxide increases, low-carbon solutions become more economically attractive. In effect, your efforts help speed up research and investment in low-carbon solutions to create a sustainable future.
Read How Climakind Works.