CARBON CREDIT AND TRADING

OVERVIEW

The direct and encompassing impact of unchecked human activity to climate change is now clearly documented as a global concern. Among the most “dangerous anthropogenic interference with the climate system” is the emission of greenhouse gases (GHGs) into the atmosphere, directly causing the rise in global surface temperature.1

GHGs in the atmosphere absorb and trap the heat of the sun reflected from the earth’s surface, causing global warming incrementally as the volume of GHGs increases across time. Among the principal anthropogenic GHGs emitted into the atmosphere are the following: carbon dioxide (CO2), methane (CH4), nitrous oxide (NO2), and fluorinated gases.2

CO2 emission is considered to be one of the most significant among these. On February 2, 2008, the Intergovernmental Panel on Climate Change declared that CO2 in the atmosphere has reached a new high of 379 parts per million (ppm) in 2005, compared with 180 to 300 ppm for the last 650,000 years. The main reasons are the burning of fossil fuels and the clearing of land for agriculture.3 This occurs because of the imbalance in the carbon cycle, induced by human activity.

Concentrations of carbon dioxide in the atmosphere are naturally regulated by numerous processes collectively known as the “carbon cycle” (Figure 1). The movement (“flux”) of carbon between the atmosphere and the land and oceans is dominated by natural processes, such as plant photosynthesis. While these natural processes can absorb some of the net 6.1 billion metric tons of anthropogenic carbon dioxide emissions produced each year (measured in carbon equivalent terms), an estimated 3.2 billion metric tons is added to the atmosphere annually. The Earth’s positive imbalance between emissions and absorption results in the continuing growth in greenhouse gases in the atmosphere.
CARBON CREDIT
 
The trading of carbon credits was therefore created to curb the effect of greenhouse gases by reducing the carbon footprint. Carbon credits are defined5 as: a key component of national and international emissions trading schemes that have been implemented to mitigate global warming. They provide a way to reduce greenhouse effect emissions on an industrial scale by capping total annual emissions and letting the market assign a monetary value to any shortfall through trading. Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price. Credits can be used to finance carbon reduction schemes between trading partners around the world.
 
 
CARBON TRADING MECHANISM
 
Created as a mechanism under the Kyoto Protocol in December 1997, transactions in carbon credits as a commodity are being promoted to curb carbon dioxide emissions. This is a compensation system wherein a buyer who has exceeded his emission cap or limit purchases a carbon credit from a seller who avoids the release of a similar amount of CO2, or has such carbon absorbed or sequestered. Hence, theoretically, carbon trading encourages the offsetting of carbon dioxide emissions in the locus of the buyer by having the equivalent amount absorbed or sequestered in the place or country where the seller resides.6
 
 
PROSPECTS
 
Louis Redshaw, a trader for Barclays Capital in London, has predicted in June 2007 that the global trading in carbon credits, then already worth $30
billion, will grow to $1 trillion in a decade. "Carbon will be the world's biggest commodity market, and it could become the world's biggest market overall," he added.7 The European Union (EU) is the largest carbon trading market, accounting for $25 billion, and the United States will most likely follow.8

However, the EU is being criticized for failing to create incentives in cutting emissions, causing the decrease in price of carbon credits.9 In addition, the market is highly deregulated as of the moment. Hence, certain carbon credits are transacted even if carbon emissions were not actually reduced.10

REFERENCES

1. http://www.agu.org/sci_soc/policy/climate_change_position.html
2. http://www.epa.gov/climatechange/emissions/index.html
   
3. http://www.sciam.com/article.cfm?id=climate-change-verdict-sc
   
4. http://www.eia.doe.gov/environment.html
   
5. http://en.wikipedia.org/wiki/Carbon_credit
   
6. http://www.climatechangecorp.com/content.asp?ContentID=4814
   
7. http://www.iht.com/articles/2007/06/20/business/money.php
   
8. http://www.iht.com/articles/2008/06/18/business/emit.php
   
9. http://greenskeptic.blogspot.com/2007/05/global-climate-change-carbon-trading.html
   
10. http://www.easygreenguide.org/CarbonCreditsExplained.html

1