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How does Carbon Trading Work?

To reduce greenhouse gasses (GHG), regulating bodies have implemented a market based approach to reduce the amount of GHGs into the environment. This market based approach, called carbon trading, is well known by carbon trading pros but not understood by the public. So how does carbon trading work?

First, a cap is set on the aggregate amount of emissions that can be let off by the total number of power stations with each power station receiving an individual amount of permits on the carbon they can emit. These permits are tradable and bankable, therefore the market can decide when and where to increase or decrease emissions. The buying and selling take place within a carbon emissions trading market. So a company that is underneath their individual cap can either bank their carbon credit or sell it to a company that is above the cap. There is a vast carbon emissions trading market that has boomed into a $30 billion industry.

Now you still might be asking yourself, how does carbon trading work? To recap, the regulating body of carbon trading pros sets the total cap on how much GHG can be emitted. It then distributes or auctions emissions credits to each company totaling the cap. Members that do not have enough credits to cover the emissions must figure out reduce emissions or can buy another firm's credits. Firms with extra credits can either sell or save them for future use. Even though not everyone understands carbon trading, the answer to the question of how does carbon trading work is that it works much better than a tax based approach.

The information supplied in this article is not to be considered as medical advice and is for educational purposes only.