When Did Carbon Trading Start?

Carbon Trading Start

In a carbon trading system, businesses can buy and sell credits that represent a reduction in greenhouse gas (GHG) emissions. Those credits can be used to offset emissions from a facility or business that otherwise would not be able to achieve GHG reductions on its own, such as a coal-fired power plant or an airline. The concept is controversial and has been the subject of considerable debate.

A key issue is the question of whether the market-based approach to reducing GHG emissions is a viable solution for tackling climate change and achieving sustainable development. The answer to this question depends on several factors, including the level of emissions restrictions applied to carbon trading, the size of the market and the degree to which it is regulated by government-imposed limits.

The first trade carbon credits were traded formally in 1997, when the Kyoto Protocol was adopted. The agreement created a global emission trading scheme that divided the world into industrialized and developing countries, with those in the former group called Annex 1 and those in the latter referred to as non-Annex 1. The countries in the Annex 1 group were allowed to trade their surplus carbon credits with those in the non-Annex 2 nations. In doing so, the richer and higher-polluting nations effectively subsidized the efforts of poorer and lower-polluting nations to reduce their carbon emissions.

When Did Carbon Trading Start?

More recently, the idea of carbon trading has grown in popularity, and there are now multiple markets for reducing GHG emissions on both a voluntary and a regulatory basis. For example, the European Union Emissions Trading System (EU ETS) is the largest carbon trading market in the world. Other regulated markets include California’s GHG emissions program and the Regional Greenhouse Gas Initiative in the northeastern United States.

These markets are based on a cap-and-trade principle where regulated businesses, such as a power station or airline, are issued with permits to emit a certain amount of GHGs. If the business exceeds its permit limit, it must buy additional permits from those who have extra ones. This allows regulated businesses to meet their environmental obligations cost-effectively.

There are also a number of voluntary carbon markets, where companies purchase credits from a wide range of sources around the globe, from reforestation to energy efficiency projects. A large industry has developed to verify and certify these credits, as well as to market them to end buyers.

While carbon markets are growing, they do not address all of the issues that surround sustainable development. One of the most significant challenges is that they can result in spatially inequitable patterns of agglomerated emissions, leading to air toxics “hot spots” where communities are more exposed to harmful pollutants than others. These types of patterns are problematic because they run counter to the principle of Coase’s market economy, which is that businesses should be free to bargain with one another and negotiate deals that benefit all stakeholders.

To reduce the spatial inequity of these patterns, it may be necessary to link carbon trading with additional point-of-source technologies that reduce local air toxics and other pollutants. This will help avoid the creation of toxic hot spots and reduce the overall adverse per capita environmental impacts of cities.