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Q+A: How do carbon trading schemes work, or not work?
December 3, 2009 / 9:40 AM / in 8 years

Q+A: How do carbon trading schemes work, or not work?

(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 industrialized 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 skeptics, 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.

Source: Reuters

Writing by David Fogarty and Gillian Murdoch; Additional reporting by Gerard Wynn in London; Editing by Sugita Katyal

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