Trading Carbon

In our AS micro lessons today we were discussing the idea of carbon trading. The students have an essay to write this week - the title is “As a means of encouraging reductions in CO2 emissions, carbon trading is an idea whose time has come”. Discuss.

In the first lesson we looked at the basic ideas behind carbon trading - concepts of such as cap and trade, emissions permits, assets and liabilities and how putting a market price on carbon is designed to alter the balance of incentives for generators of carbon. In our second lesson we will take a look at the EU-emissions trading scheme, consider the UN-monitored Clean Development Mechanism and try to develop critical evaluation skills by looking at the flaws of EU-ETS and considering why - in the words of Nick Stern, the incentive to develop new pollution efficient technology needs more than a carbon price to make major difference.

I found these BBC news audio-visual clips quite useful to provide clear background on the core basics of carbon trading.

How carbon trading works

£1 billion windfall for carbon trade firms

And this piece by Roger Harrabin is much longer (10 minutes plus) but provides useful context on the political machinations of countries edging towards a new climate change deal including an extension

Background

I went to Point Carbon for some up to date background data on the growth of the carbon trading system.

According to Point Carbon, the world market for the buying and selling of Co2 emission permits and credits grew by more than eighty per cent last year - permits and credits were traded for €40.4 billion in 2007, against €22.5bn in 2006, an increase of 80%. A total of 2.7 billion tonnes of CO2 equivalent (CO2e) were traded over the year, up 64% on the same period in 2006. The EU trading scheme which covers 10,000 power stations and other stationary sources of greenhouse gas pollution in the Union’s 27 countries is the largest in the world and saw almost two-thirds of the traded volume, with 1.6bn
tonnes CO2e changing hands and a financial value of €28bn. There is a large and growing futures market for the second phase of EU-ETS which runs from 2008 through to 2012.

The second key segment of carbon emissions trading comes under the auspices of the UN-administered clean development mechanism (CDM), under which 947m tonnes CO2e were traded, to a value of €12bn. Under CDM, a portion of the CO2 emission reduction requirements of companies included within the EU-ETS can be achieved using carbon credits from UN-sponsored emission reduction projects outside the EU including projects in countries such as India and China.

Carbon trading by itself does not reduce CO2 emissions - fundamentally the idea is that a carbon market provides a means by which we put a cost or a price on carbon emissions, and a value on emission reductions, and to enable trade of the resulting allowances or credits. Hopefully this will encourage businesses and perhaps consumers to engage in CO2 abatement in the most efficient (least cost) manner.

Europe is a long way from meeting its long term CO2 emissions reduction target. The aim is to reduce emissions by 20 per cent by 2020 and that will involve emitting 585 Mt CO2e less in 2020 than in 2010 - equivalent to around11 per cent of expected total emissions in 2010. That equates to a marginal abatement cost of around €33.5/tonne CO2