Magazine article Ecos

Catching Up with the New Carbon Cycle: While Australia Has Been Slow to Embrace Carbon Emissions Trading, the European Union and to a Lesser Extent the US Have Been Busy Exploring the Potential of Carbon Markets, Positioning Themselves for a New Global Paradigm

Magazine article Ecos

Catching Up with the New Carbon Cycle: While Australia Has Been Slow to Embrace Carbon Emissions Trading, the European Union and to a Lesser Extent the US Have Been Busy Exploring the Potential of Carbon Markets, Positioning Themselves for a New Global Paradigm

Article excerpt

[ILLUSTRATION OMITTED]

According to the World Bank, in 2006 the global market for carbon emissions trading was worth around US$30 billion--an almost threefold increase from 2005. (1)

Carbon markets function by placing a cost on carbon emissions, a value on emissions reductions, and enabling trade of the resulting allowances or credits.

Through this market-based approach to the problem of reducing greenhouse gas emissions, participants buy and sell permits for emissions or credits for emissions reductions (see box) through regulated or voluntary markets.

The proponents of emissions trading say it is the most cost-effective way of stabilising or reducing high levels of atmospheric greenhouse gases while also promoting reforestation.

Its critics, however, claim that, unless they send a strong price signal to polluters, such schemes are simply delaying the inevitable--dealing with the issue of burning fossil fuels.

The cap and trade model

The most widely accepted trading model is 'cap and trade', on which the world's largest market--the US$24.3 billion European Union Emissions Trading Scheme (EU ETS)--is based.

Under this model, a limit or cap on the number of carbon allowances allocated creates the scarcity needed for a trading market to emerge.

The EU ETS is based on a common trading 'currency' of emission allowances. One allowance (carbon credit) represents the right to emit one tonne of C[O.sub.2].

Companies that keep emissions below their allowance limit can sell their excess allowances at a price determined by supply and demand.

Those finding it hard to stay within their limits can either reduce their emissions--for example, by investing in more efficient technology or by using a less carbon-intensive energy source--or they can buy the extra allowances they need at the market rate. They can also choose a combination of the two.

Cap and trade proponents argue that this flexibility ensures emissions can be reduced in the most cost-effective way.

Companies that pollute beyond their allocated amount must purchase carbon credits, which represent emission reductions from elsewhere in the economy. These credits can either come from companies emitting less than their maximum allowance, or from a provider that is producing 'offset' credits.

Offset credits may be generated in a number of ways, such as planting trees (which absorb greenhouse gases), or flaring methane from underground mines or landfill sites (i.e. burning it to prevent it from entering the atmosphere--flaring methane results in 7.5 times less global warming potential than uncontrolled release of the gas).

Offsets are measured in tonnes of C[O.sub.2] equivalent of emission reductions compared to an established baseline.

Companies such as CO2 Australia and Easy Being Green have been active in the local offset sector, generating credits from forest sinks and energy efficiency projects, respectively.

Regulated trading schemes

The European Union's ETS has been operating since 2005 and covers about 11 500 installations in 25 member countries, accounting for about 45 per cent of the EU's total C[O.sub.2] emissions.

The EU ETS takes as its starting point the Kyoto target for reducing combined emissions of greenhouse gases by eight per cent from 1990 levels by 2008-2012. For each member state, this target has been translated into different emission reduction or limitation targets.

The cost of achieving these targets is estimated at between 2.9 billion and 3.7 billion euros annually,

Because the scheme requires mandatory monitoring and reporting of carbon emissions, participating companies are required to establish C[O.sub.2] budgets and carbon management systems. Emitters can use this information to selectively reduce emissions--for example, by improving production processes or investing in new technologies. …

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