Carbon Trading and GIS
1) How does carbon trading work?
Target – Governments set annual targets for reduction of greenhouse gases for industry. The government then subdivides this target among sectors and down to individual factories or plants. Individual emission permits are then issued up to this limit. How factories receive these permits varies, depending on the scheme. In some cases they are allocated for free. This was the case with EU-ETS. This is now moving more toward auctioning, as are a number of the other schemes.
Trading – If the factory under-emits (below their cap) they can sell their excess emission permits on the carbon trading market. If they over-emit they can buy permits from the market.
Offsets – another way to hit target is to buy offsets, or carbon credits. Commonly these are purchased on the carbons market. Some of the bigger emitters in the EU-ETS go directly to credit providers, or project developer intermediaries. They pay directly to establish offset projects to generate credits. This is often cheaper for the emitter.
This trading scheme relies on the following:
* Accurate measurement of existing and future emissions at a local, national and eventually global level
* All nations, especially the industrialised countries which have long had high emissions, committing to emissions reduction targets
* Proper verification of carbon offset projects to ensure that emissions reductions have taken place, have done so directly because of an offset agreement and the resulting emission savings are only counted once
We will revisit both measurement and verification in part 2 of this article, when we discuss GIS and carbon trading.
There are two significant legally-binding carbon markets in full operation
– EU Emissions Trading Scheme (EU-ETS)
– Clean Development Mechanism (CDM)
The EU-ETS is as yet the only major scheme of its type in operation
In the US carbon offset sales can be made through the Chicago Climate Exchange (CCX)
2) Kyoto and Carbon Credits
Kyoto Protocol requires developed countries to reduce greenhouse gases. CDM (Clean Development Mechanism) covers reduction emission projects in developing countries, and issue CER’s. Credits issued in the developed world – particularly from those countries of the former Soviet-bloc. – are done under Joint implementation (JI) and are called ERU’s (emission reduction units). Additionally there are European Union Allowances, these issue tradable emission credits from the EU Emissions Trading Scheme.
Certified Emission Reductions or CER’s are carbon credits. Equate to one tonne of CO2. These are widely used carbon trading instruments. CER’s are the closest thing to world carbon price.
The price of a CER is determined by two factors:
– Cost to generate them.
– Supply and demand by speculators
As with other commodities the latter will likely be the biggest determinate of price. From a recent news report “The price of certified emission reductions (CERs) have been boosted this month as doubts about reduced supply of the Clean Development Mechanism (CDM) credits weigh on buyers in the EU carbon market”.
There is a voluntary market in offsets. This is for companies which choose to reduce their emission outside of government regulation. A somewhat grey area, since this is unregulated. Standards have begun to appear including Gold Standard and Voluntary Carbon Standard. These provide independent, third-party verification of emission reductions.