Q+A: How Do Carbon
Trading Schemes Work, Or Not Work?
Date: 04-Dec-09
Country: AUSTRALIA
Author: Reuters
Australian Prime Minister Kevin Rudd will reintroduce legislation for a
"cap and trade" scheme to cut the country's carbon emissions, he told
reporters on Thursday, in the hope of pushing the stymied laws through a
hostile senate. With just four days to go before the United Nations Dec
7-15 Copenhagen climate change summit, several countries have come out
with their first carbon reduction pledges, which may feed into new
schemes sparked by agreements at the conference.
Here are some questions and answers on carbon trading schemes, how they
work, and why some critics object to them.
WHAT'S THE AIM OF CARBON TRADING?
Carbon dioxide, produced mainly by burning fossil fuels such as coal and
petroleum or through deforestation, is the main greenhouse gas that
scientists say is heating up the atmosphere, causing seas to rise and
greater extremes of weather.
Putting a price on every tonne of carbon dioxide (CO2) produced by
industry and transport or saved from being emitted by being more
efficient or locking away carbon by growing trees provides a cash
incentive to curb carbon pollution.
HOW DOES IT WORK?
Under cap-and-trade schemes, companies must have a permit for every
tonne of greenhouse gases, such as CO2, they emit. The more they emit,
the more permits they must have.
A government issues a set quantity of emission permits for polluting
companies, and has an overall cap on the number of permits they will
allow to be sold. At the end of each year, firms surrender permits
equivalent to their emissions.
Companies can buy or trade emissions by buying allowances from other
polluters, or from a government auction.
Over time the cap is tightened by decreasing the number of permits or
decreasing the number of free permits to big emitters. As the carbon
permit price rises, companies are forced to become more efficient and
invest in cleaner technology.
Under the only current global climate agreement, the Kyoto Protocol, 37
industrialised nations already face greenhouse gas limits, creating a
multi-billion dollar market in offsets from clean-energy projects in
developing countries.
HOW MUCH MONEY MIGHT THE NEW CARBON MARKETS ATTRACT?
Globally, carbon trading could be worth $2 trillion by 2020, from $125
billion last year, some market players say.
Europe's scheme is the largest, and only domestic, cap-and-trade system
operating. Launched in 2005, its Emissions Trading Scheme (ETS) is
mandatory for all 27 member states, and covers nearly half all EU carbon
emissions.
HOW MUCH IS IT WORTH
A separate Kyoto scheme, called the Clean Development Mechanism (CDM),
is currently worth about $6.5 billion.
Some companies have opted for an unregulated voluntary market, which
operates outside the CDM and the EU's ETS.
About 123 million tonnes of carbon credits, valued at $705 million, were
transacted in the global voluntary carbon market in 2008, according to
industry estimates. This is a fraction of the $125 billion global carbon
market.
HOW WOULD AUSTRALIA'S SCHEME WORK
A fixed carbon price of about $9.25 (A$10)/tonne would be set from July
2011. A fully open market would operate from mid-2012.
The scheme aims to cover 1,000 of Australia's biggest polluters and 75
percent of its greenhouse gas emissions.
AND WHY IS EMISSIONS TRADING CONTROVERSIAL?
Carbon market mechanisms such as cap-and-trade are often seen as more
politically acceptable and attractive to industry than carbon taxes.
Opinion polls show most Australians support action on climate change,
but are wary of the electricity and fuel cost hikes emissions trading
would bring.
Critics of the schemes range from climate change sceptics, who do not
believe carbon emissions are human-created or warrant controls, to green
groups who dislike the market-led approach.
Some environmentalists say turning carbon dioxide into a commodity by
pricing it, and giving compensation to companies who participate in
carbon markets, amounts to an undeserved subsidy for polluters, and
sends the wrong signal about the kind of action needed to the challenge.
The extent to which the schemes will actually reduce emissions is also
hotly debated.
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