1. Emission Trading
Balancing Global Climate Change with a Sustainable Economic Model
BBA - Management and International Business
In June 1992 at Rio de Janeiro the Conference on Environment and Development or popularly known as
the Earth Summit brought a very serious concern to the attention of the world community.
Global Warming, a phenomenon which ensued due to the rapid phase of human development and
unsustainable pollution of the environment. The increase of greenhouse gases due to human activity
has had a significant impact on the global climate and resulted in an accelerated greenhouse effect
which has a negative impact on the overall sustainability of the planet.
Reducing the amount of CO2 in the environment was taken as a main point in countering this
development and a new way of thinking lead nations to find alternatives in countering this threat.
The aims of this report
 Provide an Introduction to Global Warming and Its effects
 Discussion of alternatives and their feasibility
 Introduction to Carbon trading and its impact
3. Global Warming – Its Happening!
Regardless of what the skeptics say, one thing we can all agree is that the world climate has seen several
negative developments during the past century. The melting of ice caps, and the increase of the global
temperature at a significant rate are just normal observations one can make. But what exactly is global
warming? Why do we have to bother so much?
 The Green House Effect
It is the process by which absorption and emission of infrared radiation by atmospheric gases warm a
planet's lower atmosphere and surface. Existence of the greenhouse effect as such is not disputed. The
question is instead how the strength of the greenhouse effect changes when human activity increases
the atmospheric concentrations of particular greenhouse gases.
The main greenhouse gases comprises of water vapor, carbon dioxide, methane, ozone.
The increased human development and fast phased industrialization has increased the amount of CO2
(which is also a green house gas) in the planet’s atmosphere releasing huge amounts of greenhouse
gases which are unsustainable to the environment. This has destabilized the natural greenhouse cycle
and has caused the globe to increase its temperature as the planet is unable to sustain the excess Co2
 Other factors
Another alternative thought for global warming is the variations in solar activity and its impact on the
planet. It argues that variations in solar output possibly amplified by cloud seeding via galactic cosmic
rays, may have contributed to recent warming.
But on an overall note, it is considered by most that the increased global warming is mainly due to the
excessive carbon emissions released by human activity.
The Impact on the Planet
It is predicted that if not precautionary steps are taken immediately future consequences of the current
developments would be catastrophic to the overall sustainability to the survival of humans and other
living beings on the planet.
 Environmental Impact
It is predicted that the increased global temperature would have severe impacts over boarder changes
mainly the shrinking of the arctic and the glaciers that consists of that region. Even today the ice caps in
the Arctic and Antarctic regions of the world are melting at a increased phase immediately threatening
existing ecosystems in the region. It is predicted that many of the existing species in the region such as
Polar Bears and Seals would be extinct during this century due to loss of habitat.
4. The melting of ice caps also poses a significant threat in raising the sea levels reducing land mass and
threatening many smaller nations to be wiped off the map. It is also predicted that it would have a
impact on the frequency and intensity of extreme weather conditions. Changes in agricultural yields,
reduced summer streamflows, species extinctions and increase of disease vectors are all predicted
impacts the global warming would have on the planet and its living beings.
 Economic Impact
Though there has not been a clear consensus over the actually economic impact of this development, it
is predicted through a survey of 100 estimates that the economic cost of one ton of carbon dioxide
would range from US$3 to US$95 giving a mean of US$ 12. This is a significant cost that the world
economy would have to bear considering the amount of CO2 released every year.
“Stern Review” a publication which explores the economic impacts of the global warming suggests that
extreme weather might reduce global gross domestic product by up to one percent, and in a worst-case
scenario global per capita consumption could fall 20 percent. Though the findings of the Stern Review
have been critised by a number of leading economists but the publication is praised as a significant
milestone in an attempt to foresee the impacts of the global warming.
The Way Out – Adaptation and Mitigation
The broad prediction among scientists over the increase of global temperatures is that it would continue
to increase. Thus facing this problem comes in two alternatives. Adapting to the changes in the
environment and reducing the greenhouse gas production also known as mitigation stand out as the
two alternatives available.
Out of the two alternatives the latter is considered to be more viable and effective in terms of reversing
the greenhouse effect.
5. The Kyoto Protocol – Mitigating Global Warming
United Nations Framework Convention on Climate Change held in Rio de Janeiro on June 1992 focused
mainly on creating a global effort in successfully facing the threat posed by increased global warming. It
was suggested that all member countries should work towards mitigating the levels of greenhouse gases
released to the environment, thus the treaty aimed at stabilizing greenhouse gas concentrations in the
atmosphere at a level that would prevent dangerous anthropogenic interference with the climate
The treaty later established legally binding commitments from its member nations in limiting the
amount of carbon emissions released by each respective country. The Kyoto Agreement was adopted
for use on December 1997 in Kyoto Japan and 183 parties have ratified the protocol. Under the protocol
industrialized countries agreed to reduce their collective greenhouse gas emissions by 5.2% compared
to the year 1990, where as all other member states were also set limits on their emission productions.
The agreement offered “flexible mechanisms” such as Emissions Trading, the Clean Development
Mechanism and Joint Implementation to allow member states to meet their greenhouse gas emission
limitations by purchasing green house gas emission reductions credits from elsewhere. This could be
done through financial exchanges, projects that reduce emissions from states which had excess carbon
Emissions Trading – Dawn of a New Industry?
The emergence of Emission Trading was a direct result of world’s commitments to reduce the
impacts of the global warming. Emission Trading is a novel way of strategically stabilizing the
released amounts of CO2 to the environment.
Under the Kyoto Protocol some of the developed member states had to cut down on their
emission levels and reduce the amount of CO2 released. For countries who have already
exceeded their set limit the protocol introduced a novel concept of emission trading.
This allowed states which have already exceeded their allowed emission limits to buy excess
carbon allowances from states that had excess amounts of unused allowances. It also allowed
countries which have not been imposed a set limit on their carbon emissions to produce carbon
credits. Carbon credits could be produced by reducing their emissions below a baseline level of
emissions. Subsequently these credits were able to be traded at an open market creating a
whole new concept of managing and sustaining emissions produced.
6. Clean Development Mechanisms
Developed countries that are unable to meet their set carbon cap on their own are able to fund
clean development mechanisms and joint implementation projects in other countries as a way
of generating tradable carbon credits.
These assistance could come in a number of ways such as providing financial aid or
technological know-how in implementing Clean Development Mechanisms or Joint
Implementations. These include reforestation projects, development of cleaner energy projects
such as hydro-power plants or investments in greener energy such as solar or wind power.
Trade Your Carbon Credits!
The emission trading mechanism is already under work and is fast becoming a highly lucrative
market in terms of revenue generated. Since allowances and carbon credits are tradeable
instruments with a transparent price, financial investors can buy them on the spot market for
speculation purposes, or link them to futures contracts. A high volume of trading in this
secondary market helps price discovery and liquidity, and in this way helps to keep down costs
and set a clear price signal in CO2 which helps businesses to plan investments.
Currently five established trading platforms offers interested buyers and sellers a way of trading
their carbon credits. Chicago Climate Exchange, European Climate Exchange, Nord Pool,
PowerNext and the European Energy Exchange facilitate the trading of CO2 as a commodity in
the international market. Alongside this two private electronic markets have also been
established to increase public interest and involvement in this industry.
The market has seen active involvement of major businesses, bankers, investors and private
traders and was estimated to be worth around US$ 60 billion by the end of 2007. It is predicted
that if non-Kyoto Countries such as United States of America are also involved the market value
would increase significantly.
Though the trading of carbon credits is seen as a lucrative business approach, production and
development of carbon credit projects would have undergo strict guidelines from the United
Nations Framework Convention on Climate Change (UNFCCC) and are subjected to constant
monitoring and scrutiny by regulatory bodies to ensure that standards are maintained.
7. Carbon Trading – A Sustainable Plan for Business Entities
The practice of carbon would work as a sustainable approach for businesses in complying with the Kyoto
Protocol. The same methodology practices under country level could be brought in to develop a feasible
approach for business to develop their green initiatives.
Companies who release different amounts of CO2 are set specific caps on their emissions released.
These caps will be implemented after careful analysis of the overall limits the country would have to
maintain under the protocol.
Under the set limits the companies would have be provided with two alternatives, they could either buy
carbon credits from other companies or they could invest that amount in finding new systems in
reducing the emissions they are releasing to the environment.
Subsequently this would direct many companies to adopt environment friendly and greener business
8. Criticisms - Is Carbon Trading Really Worth The Money?
Although Emission trading is welcomed by many as a viable method of fighting increasing global
warming, it is seen by some as a bad investment. It draws a number of negative criticisms
ranging from unfair treatments to member states in carbon limit allocations to enduring high
costs for vaguely projected results.
1. Global Socialism Initiative/ Unfair treatment
Some accuse the Kyoto protocol and its initiatives as a means of slowing down the growth of
world’s industrial democracies by transferring wealth to the third world. It is also being accused
of disregarding the commitments made by member countries far before the protocol was
implemented and unfair treatment by selecting 1990 as the base year for the emission limits.
2. A bad investment with high costs
One of the major factors that critics point out is the high investment costs involved. It suggests
that the costs which has to be endured to mitigate carbon emissions have a vast disparity
between the actually results yield. It also accuses of vague monitoring and control mechanisms
and argues that the results doesn’t necessarily guarantee a fair investment as the actual impact
of the results are not necessarily quantifiable.
3. Wrong Direction
Another criticism is that the human intervention in changing the global weather conditions
would not yield positive results and that the efforts which are being directed towards this cause
can be directed at more pressing issues such as poverty or development. They argue that if the
same commitments made towards Emission Trading schemes were made towards eradicating
poverty it would have by now made considerable gains for the benefit of humankind.
All speculations aside, carbon trading today has evolved into a multibillion dollar market which
has introduced a whole new way of managing the green house gas production. However there
is a risk that Emission Trading could become the next sub-prime mortgage where loss of human
confidence in the program could eventually bring the industry to a standstill.
9. Reference Materials
International Organizations and Commercial Entities
 United Nations Environment Programme (http://www.unep.org)
 UNEP Finance Initiative (http://www.unepfi.org)
 Sustainable Energy Finance Initiative – SEFI (http://sefi.unep.org)
 Climate Action Registry (http://www.climateregistry.org/)
 Sierra Club (http://www.sierraclub.org/)
 Carbon Trading (http://www.carbon.sref.info/)
 Zero Your Carbon (http://www.zeroyourcarbon.com.au/)
 Carbon Farmers of America (http://carbonfarmersofamerica.com/)
 CarbonTrading.com (http://www.carbontrading.com/)
Published Articles and Online Reading Material
 Will Carbon Trading Become the Biggest Traded Commodity?
 Intelligence Squared US- Major Reductions in Carbon Emissions are not worth the
money (Media Transcripts)
 Public Attitude Towards Kyoto Protocol –EKOS Publication (June 2002)
 Carbon offsets: Are they worth your money?
 How Does Carbon Trading Work? (http://blog.enviance.com/public/item/179590)
 Setting a Price on Carbon vs. Deployment of Clean Technologies
 Public Finance Mechanisms to mobilize investment in climate change mitigation ( UNEP
Publication – Financial Report)
 Engaging Banks in Financing Sustainable Energy -SEFI
 Carbon Farming (http://www.acfnewsource.org/carbon trading/carbon_farming.html)