IS carbon trade justifiable (Part 1)

There is no doubt carbon trade, cap and trade, permit, offset have been buzzer word among environmentalist or to be specific among proponent of Global warming.  Though most of us unknowingly use these terms synonymously, there is large variation in its meaning and consequences. To be honest, before is seriously started doing some online researches on it, I too use to exchanges these terms.

Needless to say, Global warming is happening at alarming rate no matter how much we want to become deaf with our nuisance logic and disbelief at the scientific facts. This time is not to debate about climate change and global warming (it’s no longer 70s Homo sapiens sapiens) rather to work coherently in finding mitigating strategies that is acceptable to society, industrialist and policy makers.

Out of many solutions, Carbon trade is considered to be one of the ground breaking solution (I have skeptics in this case at healthy amount though). It’s very appealing from business point of view and like any commodity carbon becomes a salable product too. Hence entering into mainstream market. Very clever way to integrate global warming actor into concern matter of all. Well that’s just tip of ice berg.

What is Cap and Trade?

Cap and Trade is environmentally and economically sensible approach of mitigating GHGs emission where CAP  sets limitation of emission usually lowered with time and TRADE creates market opportunity of ‘Carbon’ where innovative companies and traditional companies meet and exchange carbon.

This system is assumed to be effective in a sense that companies are encouraged to renovate their production and service providing system and make it more environment friendly. As less they emit, less they pay and ‘Carbon’ becomes their obvious product. Hence, minimizing this become their economic incentive. In a world where ‘economy’ rules, this is coolest system to make corporate ponder on ‘lesser emission’.

Cap ensure that no any corporates emit more than what they are allowed. They are penalized for doing so and rewarded for innovation. Ever year, allowable emission is reduced to significant level hence forcing companies to renovate their system before they get trapped in financial problem for polluting more than marked.

How does it work?( referred: http://www.ucsusa.org/global-warming/reduce-emissions/cap-trade-carbon-tax )

Every source of emissions subject to the cap (for example, power plants or refineries) would be required to hold allowances equal to the emissions they produce. Power plant operators could acquire allowances through an auction (where they bid for the allowances they need) or allocation (where they are given a set number of allowances for free). Once these entities have allowances, they would be able to trade or sell allowances freely among themselves or other eligible market participants. Because the allowances are limited and therefore valuable, those subject to the cap will try to cut their emissions as a way to reduce the number of allowances they have to purchase. The resulting interaction between the demand and supply of allowances in the market determines the price of an allowance (also known as the carbon price).

 

Advantage of Cap and Trade:

First and foremost, its very efficient method. Innovative companies who can reduce their emission at comparatively low cost will do so and create trade option. Thus allowing them financial benefits. Moreover, traditional companies for whom shifting to renewable sources might come handy, will but carbon in trade. This create win-win situation for both while still maintaining emission.

Second most important advantage is increased government revenue. Government can auction the emissioncredit and those profits can be used to invest in clean sources.

Disadvantages of Cap and Trade:

Like existence of cheap labor and affordable alternative products at the market, bringing carbon into trade will follow the same suit. So for those companies who benefits heavily by continuing the use of fossil fuels will be reluctant to change or bring a renovation. Rather they might buy cheaply available credits.

Some opine that carbon offsets encourage companies to cheat, allows companies who’ve been polluting to continue as normal, and distracts from the reality.

 

Even though I have healthy amount of skepticism in “Cap and Trade” system, its efficiency cannot be ignored. I am very open in this reagards. And if any new innovative ideas are there, we should not hesitate to accept them. Construtive comments are always welcomed.

PS This is first part of “Carbon Trade” sequence. In my next article, I will be posting about carbon taxes and new topics(if I am lucky enough to find).

PS2 Looking forward to see comments and your thoughts along with relevant articles and document link from my eco warrior friends.

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