Carbon discharge trading is a policy enabling companies to trade government-issued allowances for their carbon dioxide output. Currently, about 40 countries and 20 municipalities employ either carbon taxes or discharge trading, collectively addressing around 13% of global annual greenhouse gas discharge. The significant leap in this practice occurred with the European Union's implementation of a cap-and-trade program in 2005, placing a limit on the total CO2 discharge permitted from heavy industries and utilities.
The cap's effectiveness in reducing greenhouse gases causing global warming is crucial. If set too low, it could inflate business costs and impede economic growth. Conversely, if set too high, it may not effectively curb global warming. In 2011, the carbon trading market was valued at $176 billion, potentially surpassing $1 trillion by 2020. Notably, 84% of this market comprises the EU's Emission Trading Scheme, which sets emission limits for all EU-operating businesses. In 2011, under the United Nations Framework Convention on Climate Change, countries committed to the Durban Platform, aiming to negotiate a comprehensive global cap-and-trade program's specifics by 2015.
The emission cap grants each company a specific CO2 allowance. Annually, the EU distributes approximately 2 billion European Union Allowances. To meet the EU directive, companies have the option to:
Certified Discharge Reductions (CER) credits, originating from the Kyoto Protocol, are actively traded. These credits are granted to initiatives in developing nations that effectively curtail discharge. In addition to CO2, there exist greenhouse gas emission credits encompassing a broader spectrum of pollutants. These credits play a role in meeting country-specific emission limits set in the United States, United Kingdom, Canada, New Zealand, and Japan.
The trading of EUAs, CERs, and similar units in an open market has essentially birthed a fresh kind of "currency." This market involves not just the emitters themselves, but also banks, hedge funds, and various investors. Their participation injects liquidity and enhances the efficiency of this market. Each unit in carbon trading signifies the reduction of one metric ton of carbon dioxide or its equivalent in other greenhouse gases. The idea of a tradable market linked to a conceptual notion elevates trading to a whole new level. Even though the value of a mortgage-backed security might seem distant from its underlying asset, you can still trace it back to something concrete: a loan given by a bank to a homeowner. Currency forms that are increasingly abstract are gaining traction. The financial crisis of 2008 was propelled by novel derivatives. The worth of collateralized debt obligations and MBS surpassed by far the value of the physical assets they were built upon.
Carbon trading essentially creates a new kind of currency where the worth of items like EUAs and CERs originates from an intangible, colorless gas. Their monetary value is rooted in the potential harm this gas can cause to the interconnected climate systems impacting our lives. Unlike a tangible asset such as a house, carbon credits, much like gold, lack inherent 'useful' value beyond what the market determines. However, this value isn't randomly assigned; rather, it's established to tackle a critical threat to the stability and safety of life on our planet.