Carbon trading and offsetting
Carbon trading and offsetting are strategies aimed at managing and reducing carbon dioxide (CO2) emissions from various sources, including individuals, businesses, and governments. In carbon trading, also known as emissions trading, a market system allows firms to buy and sell carbon credits, which represent the right to emit a certain amount of CO2. Governments set a cap on total emissions, and companies that emit less than their allowance can sell their surplus credits to those that exceed their limits. This approach is intended to encourage cost-effective reductions in emissions and is often viewed as more politically acceptable than direct carbon taxes.
In practice, carbon trading has gained traction since the introduction of mechanisms like the European Union's Emissions Trading Scheme and efforts by organizations such as the World Bank. While proponents argue that it creates clear financial incentives for emission reductions, critics raise concerns about potential inequalities between developed and developing nations and the risk that companies may opt to purchase credits rather than implement sustainable practices.
Carbon offsets provide another avenue for reducing an individual’s or organization’s carbon footprint by investing in projects that reduce CO2 elsewhere, such as reforestation or renewable energy initiatives. These offsets can be purchased voluntarily or as part of regulatory compliance, with the aim of driving real environmental benefits. Overall, both carbon trading and offsetting reflect an evolving approach to addressing climate change through market-based solutions.
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Carbon trading and offsetting
Summary: Carbon trading and offsetting are useful strategies for quantifying the production of carbon dioxide (CO2) by individuals, firms, and governments, in order to reduce or mitigate CO2 production.
Carbon Trading
In carbon trading, also called carbon emissions trading, governments allow firms to buy and sell their carbon dioxide (CO2) emissions on the open market; in order to reduce costs or to increase profits, firms are motivated to reduce their production of CO2. Increases in atmospheric CO2 result from burning fossil fuels (oil, coal, or natural gas), agricultural production, and deforestation. These increases contribute to the greenhouse effect and global climate change.
Carbon trading uses the free market system, rather than regulations and fines, to nudge people and firms into more environmentally responsive behavior about the CO2 they emit. In carbon trading, governments set a limit (cap) on the amount of CO2, measured in metric tons (a metric ton is 2,205 pounds) of carbon dioxide equivalent, or tCO2e, that individual polluters can release into the atmosphere but allow firms to buy additional units of CO2 emissions (carbon credits) on the open market from those firms that have not used up their allocated CO2 capacity. Thus, those polluters who use less than their cap are free to sell their surplus capacity to those who produce more than their cap. If there is more demand for carbon credits, the price will rise, and polluters will be incentivized to try to reduce their production of CO2. Governments can also reduce the total cap on CO2 emissions over time to further reduce total emissions.
Carbon trading is seen in many quarters as more politically palatable than taxes on CO2 production, because polluters may choose whether to reduce emissions (by, for example, installing new technology) or to spend additional capital in purchasing carbon credits on the open market. Carbon trading also differs from carbon taxes because the total amount of CO2 to be emitted is known (it is set by the cap), but the market price of a unit of CO2 will fluctuate based on supply and demand. By contrast, with a carbon tax, the total amount of CO2 emissions is not known, but the price per unit of CO2 emissions is known because it is set by the government.
Carbon Trading in Practice
The use of carbon trading to reduce CO2 emissions has increased in recent decades. Since 1999, the World Bank has been increasingly involved in arranging carbon transfers, especially between more developed countries and less developed countries. With the Kyoto Protocol having come into force in 2005, additional markets for carbon trading have come into play as well.
Since 2005, the European Union has operated the Emissions Trading Scheme (ETS), which requires large CO2 emitters (such as electrical generating plants and cement factories) to monitor and report on their emissions and return to their governments each year an amount of carbon credits equivalent in value to their annual emissions.
The United States has been a lesser player in global carbon trading. It is not a party to the Kyoto Protocol, which requires signing countries to reduce CO2 emissions by specified amounts. The American Clean Energy and Security Act (also known as the Waxman-Markey bill), which included a mandatory cap-and-trade system, passed the House of Representatives in 2009 but stalled in the Senate. Other carbon-trading legislation has not been successful.
In 2024, President Joe Biden worked to boost participation in the carbon market by advancing high-integrity voluntary carbon markets (VCMs). The program was meant to boost confidence and potential for success in the markets.
Criticisms and Benefits
Many economists favor carbon-trading schemes to reduce CO2 emissions because individuals, firms, and governments have clear financial incentives to reduce the production of CO2, and have clear increases in costs if they do not. However, carbon trading remains controversial. Some opponents argue that it perpetuates inequalities between the more developed and less developed countries. Others argue that it is possible for firms simply to buy their way out of polluting rather than make changes in the ways they produce and distribute goods.
Carbon Offsets
Carbon offsets are reductions in CO2 elsewhere that buyers, whether individual, corporate, or governmental, purchase to reduce their own carbon footprint. Examples of carbon offsets include renewable energy projects and reforestation programs. Some environmental groups (for example, Climakind.com, Carbonfund.org, and Fern.org) offer carbon offsets for purchase and then retire them rather than reselling them, thereby permanently reducing the amount of carbon credits that are available in the marketplace and driving up the price of carbon credits. Other organizations simply serve as brokers, certifying carbon offsets and buying and selling them in the marketplace.
Under the Kyoto Protocol, governments and firms can use carbon offsets to help to meet their CO2 reduction targets. The standards established by the clean development mechanism (CDM) of the Kyoto Protocol are used to measure and certify carbon credits and to make sure that carbon offset projects are new activities producing real environmental benefits, not simply activities that would have been undertaken even if there were no market demand for the carbon offset. Firms may purchase if required under one of the carbon-trading schemes or as a public relations effort to demonstrate their commitment to sustainability. Individuals may also purchase carbon offsets, on a voluntary basis, to balance the effects of their CO2 emissions, especially those emissions attributable to air travel. For example, one online carbon calculator estimates that a round-trip flight from New York to London produces more than three tons of CO2 per traveler.
Offsetting activities available to mitigate these emissions include planting four trees in Kenya, Central America, or the United Kingdom, or investing about $40 in sustainable energy production, such as wind power or hydroelectric power, in a range of locations.
Bibliography
"Biden-Harris Administration Releases Joint Policy Statement and Principles on Voluntary Carbon Markets." US Department of Energy, 28 May 2024, www.energy.gov/articles/biden-harris-administration-releases-joint-policy-statement-and-principles-voluntary. Accessed 31 July 2024.
Ellerman, A. Denny, Frank J Convery, Christian de Perthuis, et al. Pricing Carbon: The European Union Emissions Trading Scheme. New York: Cambridge UP, 2010. Print.
Freestone, David, and Charlotte Streck. Legal Aspects of Carbon Trading: Kyoto, Copenhagen, and Beyond. New York: Oxford UP, 2009. Print.
Miller, Debra, ed. Carbon Offsets. Farmington Hills: Greenhaven, 2009. Print.
"What Are Carbon Markets and Why Are They Important?" United Nations Development Programme, 18 May 2022, climatepromise.undp.org/news-and-stories/what-are-carbon-markets-and-why-are-they-important. Accessed 31 July 2024.
World Bank. Carbon Finance for Sustainable Development: 2013 Annual Report. Washington, DC: World Bank, 2014. Digital file.