Carbon Trading: A PrimerPosted on January 17, 2014 by Susan
Earlier this month, the European Union decided to postpone the sale of 900 million carbon allowances, increasing the price of these allowances in their carbon trading system and making it more expensive for companies to move under the cap-and-trade policy.
“Huh, what?” you ask.
In layman’s terms, this means is it will be more expensive for European businesses to burn fossil fuels and in turn, run their businesses. All of this falls under the rubric of carbon trading, a mess of protocols, standards, incentives and allocations.
In hopes of reducing pollution and climate change, government agencies and commissions have issued guidelines and regulations that govern the amount of carbon dioxide a company can release into the atmosphere. To do this, a limit (or “cap”) is set on the amount of carbon companies can burn. The governing body breaks up the total cap and sells it off in emission permits (or allowances), meaning the more permits you buy, the more CO2 you can release. Essentially, you pay for what you pollute.
An example: Big Giant Energy Inc. emits 10 tons of carbon per year, but they’ve only purchased seven emission permits (one permit = one ton of carbon emissions). Puny Energy Co. down the street releases one ton of carbon, but has purchased four permits. Big Giant Energy can buy, or “trade” (that’s where the whole “cap-and-trade” terminology comes from) from Puny Energy, the cap stays on and everyone is happy(ish).
So returning to our original news, the European Union, which sets the cap for nearly all of its member countries, decided 900 million additional carbon allowances would not be for sale, driving up the demand and the price of emission permits.
While this might put a strain on businesses, environmentalists are championing the move, as the pricing within the EU’s carbon trading system was previously less expensive and did not produce enough incentives to entice companies to invest in new, more eco-friendly technologies.