Trading our Emissions for our future.

A power plant in Brandenburg, Germany (Patrick Pleul / AP)

Most people have heard of trading stocks or maybe bonds, but how about trading the carbon that we emit? The idea of trading a gas that floats around our oceans and air probably sounds strange and may lead you to ask the question…. How does it work? and what is the point of trading carbon?

All around the world, different policies have been devised and tested to find out how we can decrease our carbon footprint. Some countries have implemented carbon taxes, a simple tax on the carbon we emit. But just hearing makes many people uncomfortable, no one wants to be taxed just because they turned on their TV! So, what’s a policy that works around having to tax our emissions?

Enter: Carbon Trading.

Trading our emissions sounds like a very futuristic policy idea that doesn’t seem realistic. But it genuinely is being used today in countries around the world.

This policy creates a financial incentive for the biggest emitters to cut back by setting a cap on total emissions that companies can release each year. Every year, companies are given allowances, which represent the amount of carbon they are allowed to use emit year. The price on the allowances fluctuates, controlled by supply and demand, but however much that price is, it allows for pollution equal to 1 ton of carbon dioxide.

The Carbon Market. Source (Conservation in a Changing Climate.)

If a heavily polluting company needs more of that allowance, they can buy it. It’s the opposite for corporations that emit less, they can simply sell those allowances to others, or keep them for the next year. Meaning they profit from being more sustainable. It also helps cut emissions of companies year over year by lowering the total cap on emissions over time.

Carbon trading gives us a market-based solution to our climate problems. The EU is one of the first to implement carbon trading, having established the Emissions Trading System (ETS) in 2005. But they had to dodge several bullets to make it the successful system that it is today.

Learn more about the EU's Emissions Trading System:

Crisis on Carbon Street.

During the Financial Crisis of 2008, the EU loosened its grip on carbon allowance and the price of carbon dropped off a cliff. As a result, businesses were only paying single-digit figures for their pollution. As a knock-on effect, those companies were less incentivized to reduce emissions -although that may have been the least of their worries during that period.

For a decade carbon price treaded in water, not going anywhere. That was a problem, the ETS was failing to limit emissions! So, the EU created the Market Stability Reserve (MSR), giving the EU the ability to tighten or loosen the number of allowances in circulation. The result? As soon as the MSR was established, carbon prices tripled and the following year, emissions dropped by 9%.

EU carbon prices( 2005 - 2020)

A multitude of benefits.

The biggest upside of creating an emissions trading system is that it is market-driven, the companies that can become greener at the lowest cost will do so. Without carbon trading, they wouldn’t have the incentive to make those greener decisions. The results shown in the European Union give reason to establish this system, to gradually decrease our heavy carbon footprint on this planet.

Our Carbon Footprint.

Faulty results.

Carbon trading may seem like a straightforward idea that can be implemented successfully worldwide, but that has already been attempted…… and rolled back.

During the UN’s 1997 Kyoto Protocol, the first-ever carbon market was created. But after reports of corruption and abuse of the system, the markets crumbled. It turns out that many of the “sustainable projects” that were involved, were questionable at best.

Former Vice President Al Gore giving a speech at the Kyoto Protocol.

Critics have also argued that if a global carbon trading system were established, economically weak countries would be able to cheat by setting carbon allowance caps that are too high or by entirely covering up their operations with accounting illusions.

What’s the future for carbon trading?

Well, if the EU were to successfully establish a global emissions trading system, 60-80% of carbon emissions could be reduced by 2035. The foundation of that would be trust, which is vital to the survival of a market. By monitoring, reporting, and verifying the market, this hurdle should be largely avoided.