*NEWS*MAKING MONEY ON GLOBAL WARMING
*NEWS*MAKING MONEY ON GLOBAL WARMING
2006-04-25 at 10:33:00 am #14878
The Carbon Trade
With climate change now an increasingly important concern for policy-makers, carbon trading is riding high on the agenda.
What is the idea behind carbon trading?
Carbon trading is a market mechanism that derives from the Kyoto Protocol as a means to tackle global warming.
the Kyoto treaty – which came into force in February 2005 -
industrialised countries must reduce total greenhouse gas emissions by
an average 5.2% compared with 1990 levels between 2008-2012.
most important greenhouse gas contributing to global warming is carbon
dioxide, which is mainly emitted by burning fossil fuels. Under Kyoto,
each participating government has its own national target for reducing
carbon dioxide emissions.
Other reduction initiatives, (deriving
from but not part of Kyoto), include company-based schemes, which also
have specific targets.
The key idea behind carbon trading is that,
from the planet’s point of view, where carbon dioxide comes from is far
less important than total amounts.
So, rather than rigidly forcing
the reduction of emissions country-by-country, (or company-by-company),
the market creates a choice: either spend the money to cover the costs
of cutting pollution (emissions), or else continue polluting
(emitting), and pay someone else to cut their pollution.
In theory this enables emissions to be cut with the minimum price tag.
Is carbon trading new?
Kyoto protocol is the first scheme that includes global trading in
greenhouse gases, but the idea of trading pollutants goes back to the
1970s when the US decided to trade sulphur dioxide and nitrous oxide to
tackle acid rain.
Neither is the idea of trading allowances for ecological protection new.
European Union, under its Common Agricultural Policy, has for some time
had schemes for trading national or local quotas, in dairy production
or fishery catches.
How big is the market today?
figures are hard to come by because the market is still fairly new,
since data is not easily available and since several different schemes
exist, not all directly comparable.
The World Bank, one of the main players in carbon financing, estimates the value of carbon traded in 2005 to be about $10bn.
Bank believes the carbon market has the potential to bring more than
$25bn (£14bn) in new financing for sustainable development to the
poorest countries and the developing world.
Trading firms, brokers and banks are among those expected to make money through commissions for organising carbon deals.
The Bank’s own carbon finance fund has more than doubled from $415m in 2004 to $915m last year.
How is carbon traded?
There are two main ways to exchange carbon.
first is what is called a cap-and-trade scheme whereby emissions are
limited and can then be traded. Under Kyoto developed countries can
trade between each other.
The European Trading Scheme (ETS) is a cap-and-trade scheme and the largest companies-based scheme around.
It is mandatory and includes 12,000 sites across the 25 European Union member states.
It came into force in 2005 and covers heavy industry and power generation, including non-European companies.
There are also voluntary cap-and-trade schemes.
The Chicago Climate Exchange (CCX) is such a scheme.
in carbon trading at regional level is increasing in America, even
though the US government has decided not to ratify Kyoto.
The UK also has its own voluntary scheme, for which companies cut their emissions in return for incentive payments.
The second main way is within a choice of project based schemes.
such example is the Clean Development Mechanism (CDM), which under
Kyoto allows developed countries to gain emissions credits for
financing projects based in developing countries without targets.
key way is dubbed Joint Implementation (JI), which involves
project-based schemes whereby one country can receive emissions credits
for financing projects that reduce emissions in another developed
Compliance is critical.
Under their Kyoto obligations,
industrialised countries have 100 days after final annual assessments
to pay for any shortfall – by buying credits or more allowances via
Failure to do so leads to further penalties.
In voluntary schemes, by contrast, this is not the case.
It sounds attractive – does it work as a way of dealing with climate change?
whether between companies or countries, only works if emissions are
reduced enough to contain global warming. Creating a market does not,
by itself, reduce emissions.Moreover, the benefits could be severely
limited if trading is not comprehensive.As important as what or who is
included is what is not included.Carbon dioxide represents only part -
albeit a crucial part; more than 70% – of all greenhouse gases.
Furthermore, the US, the world’s largest CO2 polluter, excluded itself by choosing not to ratify Kyoto.
while the US is the biggest emitter today, China, which is projected to
exceed the US in emissions by mid century, has no obligation to reduce
emissions.Even within trading schemes such as the ETS, whole sectors’
emissions are excluded, such as transport, homes and the public
sector.Aviation is the fastest-growing source of CO2 emissions, and
some experts have calculated that if it were included, the UK’s entire
allowance would soon be used up.Critics say trading carbon condones the
idea of “business as usual” and fails to emphasise the need to invest
in renewable energies and move away from fossil fuels.Trading, while it
may acknowledge the threat posed by global warming, does not address
the seriousness and scale of the problem, argue environmentalists.For
trading to work it would have to become much broader – perhaps even
embracing personal carbon allowances for individuals, some say.More and
more scientists are saying that the carbon dioxide ceilings under the
treaty are too high – perhaps far too high – to help avert serious