What is Carbon Trading?

Carbon Trading is acknowledged by the United Kingdom, European Union, Australia and increasingly America and China as having a vital role to play in carbon emissions reduction (CER) world wide. The need to reduce man made carbon emissions in order to avoid 'dangerous' levels of global warming has been identified by the Intergovernmental Panel on Climate Change (IPCC) with increasing certainty over the last 20 years, to the point where it is widely accepted a world wide reduction in Co2 emissions of 80% is required by 2050.

Carbon Trading provides a market based pricing mechanism which allows CO2 emitting organisations to acquire CER Credits from accredited CER schemes, either set up under the Kyoto agreement or as regulated voluntary schemes, or from participants in the 'cap and trade' schemes such as the EUETS and the upcoming Carbon Reduction Commitment.

Under a 'cap and trade' scheme participants are regulated as to the amount of CO2 they can emit in any one year and they must surrender emission allowances bought from the scheme in advance based on an emissions forecast. If the participant has not acquired sufficient allowances, either because the envisaged CER schemes have not yielded sufficient savings or the forecast was too low, then a purchase of a balancing amount of allowances is required from scheme members with surplus allowances i.e. those who acquired too many.

This is carbon trading and is deemed to be vital by Lord Stern, author of the Stern Report 2006, in keeping the cost of CER down to an acceptable level of around 2% of GDP.