Q. What is a carbon market?
- David, Brooklyn
A. A carbon market is an idea that uses the market place (think haggling, trading, bargaining) to reduce greenhouse gas emissions. Under a scheme called cap-and-trade, a governing body — let's say the US federal government — places a limit on the tons of CO2 the country is allowed to emit and ratchets it down each year. The lower the cap, the more valuable the gas becomes. Businesses can buy the right to emit more CO2, or sell it if they've found a way reduce emissions. Each 'carbon allowance' the government issues is permission to emit one metric ton of CO2.
For example, if a company we'll call Alota Power typically emits 100 million metric tons of CO2 a year, but invests in cleaner technology that successfully reduces its emissions to 80 million tons annually, it has 20 million unused carbon allowances it can sell to another company. Suppose Whata Steel Corp, is struggling because it usually emits 130 million tons, but under the cap is permitted only 110 million. It can buy the 20 million carbon allowances it needs from Alota Power.
The goal is to push CO2-emitting companies to invest in clean energy technologies and quickly retire those that produce a lot of greenhouse gases. According to many economists, the 'trading' that will occur in a carbon market (or any market) ensures that people will find the least expensive means of transitioning to a low-carbon economy.
The European Union established a mandatory carbon market in 2005, and US Senate will debate legislation in June that could create a nation-wide cap-and-trade system as early as 2009.
Story by Victoria Schlesinger. This article originally appeared in Plenty in May 2008. The story was added to MNN.com.