Emissions Trading – How Does It Work?

Emissions trading. Various governments are developing or are at least talking about schemes which reduce greenhouse gas pollution by letting "The Market" price 'carbon' pollution to drive it down.

But what is it? Does it work?

emissions trading - perhaps not as complex as you think.

The origin of that scheme is in the Kyoto Protocol summary, Article 17.

Those signatories that have commitments under this Treaty, adopted on 11th December 1997, accepted certain targets by which to reduce or limit their greenhouse gas emissions. Among these gases are:

  • Carbon dioxide - responsible for 9–26% of greenhouse effects
  • Methane - 4–9%
  • Water vapour – 36–70%
  • Nitrous oxide – 6% Laughing gas, 300X powerful than CO2!
  • Ozone - 3–7%
  • Nitrogen trifluoride (not covered under Kyoto Protocol

It's worth noting that methane (eg, cattle farts and burbs!) is the more powerful greenhouse gas, but acting and decaying faster than the longer-term presence of CO2.

OK. So we have an acceptance that greenhouse gases cause global warming, resulting in climate change and resulting effects. Yes, I know there are skeptics, but we'll proceed from this conviction.


Australia is the latest, 2008 addition of signatories to the Protocol and is now working to implement a emissions trading scheme. It will then join the UK, Denmark, Norway and New Zealand. The European Union has the largest emissions trading system in the world.

So What Is Emissions Trading?

It's cap and trade, for one...

It is a government administered scheme where greenhouse gas pollution is reduced by setting limits (the cap) to the emissions of industry sectors and allowing the buying and selling (the trade) of 'carbon' permits, or credits.

How does that achieve anything?

Well, first certain industries, say coal-based electricity generators, are told that for their industry sector only a particular total level of greenhouse gases will be allowed. If the electricity generator produces more it may buy carbon permits from others that pollute below this level.

These permits will be priced through auctioning them Or the polluting industry may find it more profitable to implement alternative, clean technology. Or... go out of business. Whatever costs them less.

Governments may – probably will - apply a schedule where the "cap" on emissions is progressively set lower as alternative, low-emission industries increase.

It is thought to be an effective way to lower emissions at the lowest possible cost to the community. But not cost-free! Modeling for the Australian emissions trading scheme forecasts a 17% increase in power bills.

In addition to the inevitability of rising gas prices because of peak oil, trading in emissions will further raise them. Transport based on fossil fuels, including air travel, being a major emitter of greenhouse gases. Ouch!

Difficult for governments.

Difficult for you and me, but I'd rather that than my children feeling the worst of effects of global warming. You?

It's like choosing for them between the two ends of sea level rises by 2100. 15 metres if we pull out all stops, or 100 metres if business-as-usual? (www.envirolink.org/orgs/edf/sitemap.html )

Today some 57% of the world's energy sources used to "power the world" are coal and oil (www.envirolink.org/orgs/edf/sitemap.html ). The rest are natural gas, hydro, nuclear, biomass and other renewables. Denmark is on track for 50% of its power to be from wind by 2030 (www.abc.com/sections/us/global106.html ). If they can, why not us?

But, sorry. Emissions trading is solely based on the power of the hip pocket, economic incentives. One hopes a sense of moral obligation comes into saving our planet too...

Baseline And Credit

Oh, and there's the "baseline and credit" approach to emissions trading.

Here no cap is set for some polluters. Instead these earn 'credits' by reducing emissions below a certain 'baseline'. They can sell these to polluters that are under regulatory pressure to stay below a set level.

Carbon Tax

Governments could of course slap a straight carbon tax on polluters and users. Electorally that might be a very difficult thing to implement without voters tossing them out. Who likes taxes?

How are Emissions Trading Units Quantified?

In any emissions trading scheme pollution is measured and reported to a central administrator. Countries do this at every emission producer's site as well as report nationally. Some measurements are physically measured in chimneys or theoretically calculated, with 3rd party verification.

The schemes are enforced through fines or sanctions.

Units are identified in various ways.

An AAU is an "assigned amount unit", the overall national allowance for 2008-2012, agreed to by Kyoto Protocol countries The following emissions trading units each equal one tonne of CO2:

  • RMU - a "removal unit" based on land-use or change and forestry practices;;
  • ERU - an "emissions reduction unit" as a result of a joint implementation project (where a Kyoto participant's activities in another participant's country offsets emissions);
  • CER - a "certified emission reduction", generated by a clean development project in a developing country by another Kyoto signatory.

The European Union has the "EUA", equivalent to Kyoto's "AAU."

Emissions Trading Here To Stay?

Well, you tell me...

A 240% increase in carbon emissions trading, in 2005, relative to 2004, has been recorded by the World Bank's Carbon Finance Unit.

That is from 110- to 374 metric tonnes of CO2 in one year. The size of this market was $64 Billion in 2007, from $11 Billion in 2005.

Of course emissions trading is only a small part of what it takes to live with the inevitable effects of global warming.

Changing your thinking about your relationship to Mother Earth and her natural processes and wealth – and your purpose for being here - is the first thing.

Then you may feel like implementing energy efficient living strategies that do not cost the Earth.

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