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Carbon market – definition and meaning

The carbon market is a market in which we trade carbon emission allowances. The market aims to encourage companies to limit their emissions of CO2. It also wants to encourage countries to reduce their emissions. CO2 stands for carbon dioxide.

The terms carbon trading, emissions trading, and carbon emissions trading mean the same as ‘carbon market.’

Carbon emissions trading is an environmental policy device that places an economic cost on carbon emissions.

Governments set a price for CO2 emissions. Businesses subsequently have to pay for the amount of carbon they emit. This creates an economic incentive not to pollute.

In the European Union carbon market, for example, companies have to operate within a CO2 cap. Those emitting too much can buy allowances from low-emitting corporations. In other words, they can buy from companies that emitted below their limit.

The European Commission says it aims to have 21% lower carbon emissions in 2020 than in 2005. It also hopes to have 43% lower emissions in 2030 than in 2020.

According to an IETA (International Emissions Trading Association) survey, 88% of respondents saw carbon markets as an effective policy instrument.

Dirk Forrister, CEO and President of IETA, said:

“This year’s survey (2015) is a sign that, after a few years of crisis and reform, market participants see a stronger EU ETS (emissions trading system) in the future, and that sentiment is increasingly positive around the world. Recent years have seen a burst of activity in new market development, which is reflected in the survey.”

“The message for Paris is that markets matter – and the challenge for policymakers is to bring together all these bottom-up efforts and find a way to make the links between domestic actions and international contributions.”

Carbon market – emissions

CO2 emissions occur when carbon dioxide is released into the atmosphere. Human activities or natural processes release the gas. For example, the burning of fossil fuels is a human activity. In fact, even food waste contributes to emissions, say German scientists.

Emissions trading - carbon market
XYZ Inc. was able to adhere to regulations by buying some of John Doe’s leftover allowance.

The Earth has natural processes that remove carbon from the atmosphere. These processes keep the naturally-emitted CO2 levels stable. Animal and plant respiration are examples of natural carbon emissions.

The Earth cannot remove carbon emissions that human activities cause. Since the Industrial Revolution, CO2 concentrations in the atmosphere have increased considerably.

CO2 is a greenhouse gas. Greenhouse gases contribute to the greenhouse effect by absorbing infrared radiation. Carbon dioxide traps heat as it travels upwards away from Earth towards space.

If we fail to stop CO2 levels from rising, global warming will accelerate. In fact, scientists today warn that the consequences are potentially life-threatening.

Carbon market – offsetting

Carbon offsetting is the process by which companies and households can compensate for the release of greenhouse gas GHG emissions. GHG stands for greenhouse gas.

Households and companies do this by funding certified GHG reduction projects. These projects either destroy the emissions or sequestrate CO2. They also fund projects that prevent emissions elsewhere.

A carbon credit is a financial unit of measurement. It represents the removal of one tCO2e from the atmosphere.  tCO2e stands for tonne of carbon dioxide equivalent.

Carbon credits come from successful greenhouse-gas-emission reduction projects. In other words, projects that deliver reductions in emissions. They reduce emission by either replacing the use of fossil fuels with renewable energy or reducing fossil fuel usage through energy efficiency.

Carbon credits also come from capturing and storing released carbon in plants.

Video – The Emission Trading Scheme