CARBON EMISSIONS TRADING

Carbon emissions trading is a mechanism that allows companies to trade permits to emit carbon dioxide or other greenhouse gases with each other This mechanism is a market-based approach to control pollution and allows companies with different costs for reducing emissions to achieve their emission reduction targets at the lowest possible cost.

Companies having to achieve emission reductions are assigned a quota for carbon that they are allowed to emit. If a company emits less than this quota, it is able to sell its surplus carbon credits to another company that has exceeded its quota. Having an emissions trading system allows companies a choice between achieving emission reductions through internal abatement or through the purchase of carbon credits from other companies.

The most active emissions trading market in the world is the European Union (EU) Emissions Trading Scheme, which was formed in response to the Kyoto Protocol, obliging EU countries to achieve emission reductions of 8 percent below the level of emissions in 1990. Emissions trading in the EU commenced in January 2005. The EU emissions trading scheme is the biggest driver for carbon permit prices globally. The most active participants in the carbon markets are large companies with a quota to emit, trading houses, banks, and hedge funds.

The global carbon market has grown exponentially since 2005 and is estimated to have a transaction value in excess of $143 billion in 2009, according to the World Bank. With newly emerging emissions trading schemes in Korea, Australia, New Zealand, California and Japan, the global carbon markets are expected to grow even faster. With the emerging emission trading schemes, the demand and supply from these schemes will become increasingly important in the price-formation process for carbon permits.