CAP&TRADE SIMPLIFIED

FACTBOX-How emissions trading works
David Fogarty (w/Gerard Wynn and Sanjeev Miglani) November 24, 2009 (Reuters via Forbes)

"…Following are some facts on carbon trading…

"WHAT IS THE AIM?…Carbon dioxide, produced by burning fossil fuels 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."

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"HOW DOES IT WORK?…Carbon markets allow polluters to buy rights to emit CO2 and are often seen as more politically acceptable than carbon taxes…[A] cap is created by making it illegal to emit greenhouse gases, such as CO2, above a certain level…A government issues a limited quantity of emission permits for polluting companies or operations. At the end of each year, firms will be required to surrender permits equivalent to their emissions.

"If companies exceed their limit they can buy allowances from other polluters which stay under their cap or from a government auction…Over time the cap is toughened and the amount of permits also decreases, pushing up the carbon permit price and forcing companies to become more efficient and invest in cleaner technology…Under the U.N.'s Kyoto Protocol, 37 industrialised nations face greenhouse gas limits, creating a multi-billion dollar market in offsets from clean-energy projects in developing countries."

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"WHAT'S THE POTENTIAL FOR THIS MARKET? …[T]he global carbon market could be worth $2 trillion by 2020, from $125 billion last year…Europe's [Emissions Trading Scheme (ETS)] is the largest and the only domestic cap-and-trade system operating. The separate…[Kyoto Protocol/UN system] called the Clean Development Mechanism is worth about $6.5 billion.

"The [ETS]…launched 2005, is mandatory for all 27 member states and covers nearly half of all EU carbon emissions…The target is to cut emissions 21 percent below 2005 levels by 2020. Member states allocate a quota of carbon emissions allowances to 11,000 industrial installations…[M]ost permits [are] free now but many electricity generators will have to pay for all these from 2013…Companies can buy carbon offsets from developing countries if that works out cheaper than cutting their own emissions…"