Carbon Trading for Dummies

by Tim Hanlin, Australian Climate Exchange

Whenever I travel I am often asked by the taxi driver what I do and my answer elicits responses that range from: “So what is this carbon trading?” through to: “It’s all a scam and a way for governments to raise taxes by stealth”.

I am yet to find a cabbie who really knows what carbon trading is and given that they are the unofficial litmus test for public awareness I will hereby attempt a cabbie’s guide to carbon trading.

We must start with several “givens” so if you can’t accept these, stick to the “it’s all a scam” position. For those still with me:

• We must reduce our production of CO₂ and other “Greenhouse Gases” (GHGs) to levels that are within the biosphere’s capacity to process them, thereby stabilizing the concentration of these gases in the atmosphere.
• The human induced activities that produce these GHGs (as a waste stream) are set to increase dramatically as the population continues to increase and the developing world strives to attain parity with the developed world.
• We must therefore develop, deploy and transition to technologies that have dramatically lower rates of GHG emissions per unit of production.

Carbon Trading is a market mechanism that provides a price signal to encourage investment in low/no emission technologies by providing a tradable “Credit” to those that undertake activities at a lower rate of GHG production than “business as usual”. Depending on the design of the scheme, this is usually at the expense of high emission technologies by requiring them to buy a permit to emit or a Credit (in lieu of a permit) from a low emitter thereby establishing a carbon price and a value transfer from high to low emitters.

Because this mechanism is an artificial market construct where demand is created by a regulatory obligation, the devil (and the effectiveness of any scheme) is in the detail. Oh and do I get extra points for not mentioning Global Warming or Climate Change?

See the following link http://www.youtube.com/watch?v=8Q-o7IoBxEg for a short and simple video explaining the concept behind emissions trading.

Carbon Trading for Real Dummies

by the duck

Carbon (or Emissions) trading is based on the belief that mankind has been very dirty, polluted the earth's atmosphere and caused climate change.

(Those who don't think this is true are called Climate Change Sceptics because they think climate change is a natural event and not one caused by humans)

According to those who believe in man made climate change the biggest cause of this is Green House Gases (GHGs) or emissions, in particular Carbon Dioxide (CO2).

So why is that a problem? Well scientists say there is way too much CO2 hanging around in the atmosphere. Since its not being used, its causing heat. The reason for that extra abandoned CO2 is industry has been busy making electricity, cars, furniture, paper, steel etc. In fact most things.

Its been doing that by using cheap, easy to get, traditional energy like oil and coal. These are fossil fuels which are heavy in carbon. (Fossils are the remains of living things. And all living things are rich in carbon)

Normally CO2 is taken in by the oceans and vegetation. But scientists now say there is way too much CO2 hanging about, far too much for the oceans and trees to process.

This becomes more problematic because countries such as Brazil, India and China are rapidly building up their industries and becoming richer. They want to have the same standard of living as Western Europe, North America, Japan, Taiwan, Korea, Australia and New Zealand.

So they're doing what the richer countries used to do, industrialize and make lots of things. But since there are lots of people in Brazil, India and China, they can not only make lots of things... they need to make lots of things. That's how they make money.

At the same time wealthier countries are giving off GHGs with their own factories, mines, energy production, transportation etc etc.

All this industry means increased CO2. The European Union has an emissions trading scheme. Many other countries are working to adopt similar carbon or emissions trading schemes. Australia is one of these.

Carbon trading tries to make industry cleaner, smarter and more efficient.

Industries that use clean technology are rewarded with credits. These credits are valuable to the traditional energy industries, such as coal and oil.

So what are the basics of carbon trading?

Industries will need points to produce CO2. There are two types of points: permits and credits.

Some businesses are awarded a certain number of permits for CO2. Normally one permit is permission to produce one tonne of CO2.

So if the government has given an electricity producer permission to let off 100 tonnes of CO2, then the electricity producer would need 100 permits.

But what happens if that electricity company produces 120 tonnes of CO2? It will need to somehow offset the extra 20 tonnes. It does this by buying 20 carbon credits. These it can buy from a business which has been pooling carbon credits (a bit like a bank) or it might go directly to a large clean energy company.

A credit is equal to one tonne of saved CO2.

So how do companies earn a credit. Here's a classic example.

Lets say a wind farm produces enough energy for 100 houses. It does this without causing any CO2. While a traditional energy supplier might let off 20 tonnes of CO2 to provide energy for the same 100 houses. The wind farm therefore has earnt 20 carbon credits.

At the moment carbon trading is not something the general public can get involved in.. That's because the government hasn't included Voluntary Trading within their model. Under Voluntary Trading the ordinary person might earn credit points. These could be invested into a pooled fund, then traded...a bit like shares...