A Critical Conversation on Climate Change ... - Green Choices

‘made in the usa’ – a short history of carbon trading 47What is Carbon Trading?There are two kinds of carbon trading.The first is emissions trading. The second istrading in project-based credits. Often the twocategories are put together in hybrid tradingsystems.Emissions tradingSuppose you have two companies, A andB. Each emits 100,000 tonnes of carbondioxide a year.The government wants to cut their emissionsby 5 per cent. It gives each companyrights, or ‘allowances’, to emit 95,000 tonnesthis year. Each company must either reduceits emissions by 5,000 tonnes or buy 5,000tonnes of allowances from someone else.The market price for these allowances isusd 10 per tonne. Company A can reduceits emissions for half this cost per tonne.So it’s reasonable for it to cut its emissionsby 10,000 tonnes: if it sells the extra 5,000tonnes (for usd 50,000) it will be able torecover its entire expenditure. So the companysaves usd 25,000.For company B, making reductions is moreexpensive. Cutting each tonne of emissionscosts it usd 15. So it decides not to reduceits emissions, but instead to buy the 5,000tonnes of surplus allowances that companyA is offering. If company B reduced its ownemissions, it would cost usd 75,000. But ifit buys company A’s surplus allowances, thecost is only usd 50,000. So company B alsosaves usd 25,000 on the deal.Both firms, in short, save usd 25,000 overwhat they would have had to spend withouttrading. If they are the only two companiesin the country, this means the country’sbusiness sector winds up cutting emissionsjust as much as it would have underordinary regulation. But by distributing thereductions over the country’s entire privatesector, it costs the sector as a whole usd50,000 less to do so.Some emissions trading schemes allowcompanies to save any surplus allowancesthey have for their own use in future years,rather than selling them.Emissions trading is also sometimes called‘cap-and-trade’.Trading in project-based creditsSuppose you have the same two companies,A and B, each emitting 100,000 tonnes ofcarbon dioxide a year. Again, the governmentwants to cut their emissions by 5 percent, so it gives each company allowances toemit only 95,000 tonnes.But now the government tells each companythat if it doesn’t want to cut its emissionsby 5,000 tonnes each, it has anotheroption. It can invest abroad in projects that‘reduce’ emissions of carbon dioxide 5,000tonnes ‘below what would have happenedotherwise’. Such projects might includegrowing crops to produce biofuels that canbe used instead of oil; installing machineryat a chemical factory to destroy greenhousegases; burning methane seeping out of acoal mine or waste dump so that it doesn’tescape to the atmosphere; or building awindpower generator. The price of creditsfrom such projects is only usd 4 per tonne,due to low labour costs, a plethora of ‘dirty’factories, and government and World Banksubsidies covering part of the costs of buildingthe projects and calculating how muchcarbon dioxide equivalent they save.