Wednesday, 27 January 2010

How The Carbon Credits Trading Works And Its Effectiveness

By John Paul Morgan

The terms carbon trading and carbon credits are used in conferences about global warming everywhere, but not everyone comprehends what is meant by these words. In the carbon trading system, industries have to stick to the emission caps of greenhouse gases as fixed by the Kyoto Protocol that decides and allocates these limits across nations to encourage regulated emissions or discourage carbon-centric methods of operating industries.

Governments and industries in many countries are permitted a particular number of carbon credits, providing them with the right to release a restricted amount of carbon dioxide and other greenhouse gases into the air. One carbon credit amounts to one ton of carbon dioxide released in the environment. This basically entails that high-emission industries can buy carbon credits from low-emission industries, thereby keeping the total global emissions within the stipulated cap.

This system makes corporations pay a penalty for greenhouse gas emissions that go beyond reasonable limits, and this penalty on them is implemented by making purchase of carbon credits compulsory for them. However, this is a reciprocal trade where selling and purchasing of carbon credits are done simultaneously by low and high emission companies. Hence the economy as a whole does not get affected at all, while organizations with environment friendly mechanisms make more profits. This makes organizations shift away from the carbon-intensive methods of manufacturing, and so the emission levels fall.

A firm - big or small- that timely opts for a cleaner and greener approach to operating business is certain to be rewarded as carbon credits are traded on the open bourses and can be bought or sold by anyone. The trading mechanism implies that the benefits to greener organizations are immediate and huge. Moreover, country-wise allocation of limits makes national governments more actively encourage local companies to decrease emissions. This in turn enhances the government's image and makes it proactively work towards environment protection, something that is immensely efficacious in promoting eco-friendly technologies.

Other options like carbon tax are also in place in some countries of the world, which brings to book high emission industries rather than financially incentivising the low emission ones. The efficacy of such schemes is still a matter of debate.

Till now no other system has been able to efficiently handle the issue of carbon emissions in a better way than carbon trading. The efficacy of the system is clear from the unparalleled increase in the carbon trading market witnessed in the last few years.

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