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Solution For Your Confusion Over: Carbon Trading & Kyoto Protocol

Carbon Trading

Carbon trading aimed to reduce the emission

The concept of carbon trading has been confusing for most of us. Starting with the Kyoto Protocol, it is mainly aimed to reduce the emission and was adopted in 1997 but came into force on 2015 at the 7th conference of parties at Marrakesh. Rules for implementation were adopted and called Marrakesh Accords. It stated the first commitment period which starts in 2008 and ends in 2012, afterward there was a second commitment period starting from 2013 and ending in 2020.

Carbon Trading

Now, under the first commitment period, the idea was to reduce the greenhouse gas emission by 5 per cent against the 1990 level that means whatever was the level in 1990 it should be less than that by 5 per cent. However, under 2013-20 the idea is to reduce this level by 18 per cent. Considering this the major focus was the reduction in greenhouse gases as we know of numerous GHG(greenhouse gases) like carbon dioxide, sulfur dioxide, CFCs and so on. Out of these, carbon dioxide is most prominent and most common gas, as a result, the major focus was to reduce the emission in terms of carbon. This reducing of emission in terms of carbon is called the Carbon Trading where we mainly focus on the reduction of carbon emissions. This carbon trading came into force as an idea which was to reduce the amount of carbon, one of the major greenhouse gases.

Carbon trading is nothing but just a financial incentive which is aimed to reduce the carbon emissions. 

Carbon Trading

There are two companies(A & B) which are producing product X. However, company A is polluting or releasing a certain amount of carbon dioxide in the atmosphere and similarly, company B is also releasing a certain amount of carbon dioxide emissions into the atmosphere. There is the emission cap as the standards, also to be called as cap-and-trade that means that there is a cap that has been decided by the national bodies or the government has set the maximum allowances or permissible limit for pollution. And beyond that cap whatever is there, you need to trade. So if the company A is polluting under this level means the fraction of that section of carbon dioxide is unused, however company B is producing much beyond the emission permissible limits. So, company B needs a permit to release that extra amount of carbon dioxide. Now, what is to be done here is mutual trading where company A can sell its permits to the company B. So, company A would be financially rewarded since it is selling the permits and it will have a financial deal and on the other hand, company B requires this much of carbon dioxide to be produced as an emission from its industry so it would buy the credits and continue with its industry, hence making a mutual balance that could exist.

Carbon Trading

Now, under the Kyoto Protocol, we had annex-I and non-annex-I countries also called as Annex-A and Annex-B. Annex-A is the developed nations; on the other hand, Annex-B is the developing nations. Developed nations have higher standards for the emission cap and producing at that standard become difficult for the Annex-A countries, however, Annex-B countries, on the other hand, have good CRS that is certified emission reduction units. In simple terms, one credit unit of carbon trading is equal to one ton of carbon dioxide equivalent. In some standards, for example, the Chicago commodity exchange has around 100 metric tonnes of carbon dioxide equivalent so we have different units for different standards. So, say, the permissible emission standard for India is 500 wherein the same in the United States could be raised up to 700, so raising the minimum permissible cap will allow the companies to pollute or to release carbon dioxide up to the level of 700 in the U.S as compared to 500 in India. The higher cap will decrease the value of allowances because with the higher cap the value of the allowances permitted in the U.S. would be much lower than that in India. However, if the company is having lower cap its allowances will be scarce and those would be overpriced.


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