Carbon Market

From Wikipedia, the free encyclopedia

"Carbon market" Carbon Market.

Personal carbon trading and carbon offset

A coal power plant in Germany. Due to emissions trading, coal may become a less competitive fuel than other options.

Emissions trading (also known as cap and trade) is a market-based approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants.^[1]
A central authority (usually a governmental body) sets a limit or cap on the amount of a pollutant that can be emitted. The limit or cap is allocated or sold to firms in the form of emissions permits which represent the right to emit or discharge a specific volume of the specified pollutant. Firms are required to hold a number of permits (or credits) equivalent to their emissions. The total number of permits cannot exceed the cap, limiting total emissions to that level. Firms that need to increase their emission permits must buy permits from those who require fewer permits (Stavins 2001, p 4.).^[1] The transfer of permits is referred to as a trade. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions. Thus, in theory, those who can reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest cost to society.^[2]
There are active trading programs in several air pollutants. For greenhouse gases the largest is the European Union Emission Trading Scheme.^[3] In the United States there is a national market to reduce acid rain and several regional markets in nitrogen oxides.^[4] Markets for other pollutants tend to be smaller and more localized.