What is Carbon Trading?
Carbon trading is now a major global concern that unites governments, large corporations and private individuals in a way that benefits our planet for the long term.
In short, we have come to accept that the way that we live in today’s world produces carbon emissions (damaging pollutants).
Therefore, international active projects which have a proven ability to reduce carbon emissions are recognized and rewarded with carbon “credits”. The exchange of these negative emissions for positive credits and the subsequent venture trading that takes place, has now become one of the world’s biggest markets. In fact, it is said that the Carbon Credit market is actually set to eclipse all previous markets as it continues to demonstrate high appreciation in value. Whilst it primarily serves to aid the environment in which we live, it has the added advantage of providing a strong profit stream for investors.
The Carbon Credit market is now reported to be worth approximately US$188 billion – it was one of the only markets that continued to increase in value during the recent years of worldwide recession. Projections for 2013 state that the total transacted value in the carbon markets will reach US$669 billion, making it one of the biggest growth investment stories of all time (source: Carbon Emissions Trading Markets Worldwide, 2010)
How is Carbon Trading regulated?
The Kyoto Protocol has generally been viewed as one of the most significant steps in turning Carbon Credits into serious business.
It was devised by the United Nations and became official in 2005, with 188 signatory countries now adopting the rules of ifs framework. The shared contributions of these countries are set to reduce greenhouse emissions by 5.2% by 2012 (from 1990 levels). Tthis means that the European Union has a reduction target of 8% and Japan 6%. Emerging countries that have a proven ability to reduce greenhouse gases are eligible to receive carbon credits that can be exchanged for funding. As the Kyoto Protocol has now entered its second phase, more stringent targets are being developed.
Spain recently announced that in order to comply with the Kyoto Protocol they will be purchasing 6 million tonnes of carbon credits which equate to a spend of €1.2 billion. Other member countries will have a similar requirement.
In addition, the European Union’s Emissions Trading Scheme (EU ETS) was formed in 2005 and includes a sum total of 11,000 power stations and industrial plants in 30 countries. It is now the largest multi-national trading scheme in the world. It functions by setting a “cap” on overall carbon emissions but these allowances can be bought and sold depending upon use.
The heavy penalties that are charged to any company lacking the appropriate amount of allowances in relation to their Carbon usage have further raised the attributed value of the allowances themselves. The scheme is referred to as “cap and trade” and it is now being linked to compatible systems worldwide such as the Chicago Climate Exchange that trade credits voluntarily between the 400 members including Ford, DuPont and Motorola.
Part two coming soon...Who buys carbon credits?
David Martin is the Managing Director and Owner of Carbon Expert.