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Rules for Carbon Trading

Carbon trading is a system for reducing the total emissions of a country's industries by forcing polluters to buy carbon credits, which give them the right to emit carbon into the atmosphere. By controlling the distribution of carbon credits, governments can help lessen the impact of industry on the environment.

  1. The Kyoto Protocol

    • The Kyoto Protocol, which is among the most comprehensive international environmental treaties ever enacted, lays out a framework for carbon trading as a means of reducing greenhouse gases in the atmosphere. While most major industrial nations ratified the Kyoto Protocol, the United States is notably absent from the list of participants. Instead, it is U.S. policy to enact federal carbon trading laws that stem from specific national goals.

    Credits

    • Any system of carbon trading needs rules for establishing the definition of carbon credits. In most proposed systems, a single credit represents one metric ton of carbon emitted into the atmosphere. Using this definition, companies that buy credits must be able to measure their actual carbon output to show that it is below the number of credits they hold.

    Markets

    • Carbon markets, in which companies buy and sell carbon credits, are governed by rules that come along with the carbon trading system. These markets must be free, allowing buyers and sellers to come to a mutually agreed-upon price for a carbon credit based on the state of the market and the laws of supply and demand.

    Deadlines

    • A carbon trading scheme also includes rules to control the deadlines for reducing the total number of credits available. The government may reduce the number of credits each year, or work toward long-term deadlines for reducing the total number of carbon credits to a specific level. Setting and meeting these deadlines allows carbon credit buyers and sellers to anticipate changes in the market as the supply of available credits diminishes, driving prices higher until demand also decreases.

    Enforcement

    • Carbon trading can't be effective without adequate enforcement. Rules need to be in place to punish companies that produce more carbon than they have credits for. In addition, the government must be able to inspect factories to ensure that the carbon emission information provided by the companies is accurate.

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