What Is a Carbon Trade?

Carbon trading is an exchange of credits between nations designed to reduce emissions of carbon dioxide.

Carbon trading is also referred to as carbon emissions trading. Carbon emissions trading accounts for most emissions trading. 

Why We Have the Carbon Trade

When countries use fossil fuels and produce carbon dioxide, they do not pay for the implications of burning those fossil fuels directly. There are some costs that they incur, like the price of the fuel itself, but there are other costs not included in the price of the fuel. These are known as externalities. In the case of fossil fuel usage, often these externalities are negative externalities, meaning that the consumption of the good has negative effects on third parties.

These externalities include health costs, (like the contribution that burning fossil fuels makes to heart disease, cancer, stroke, and lung diseases) and environmental costs, (like environmental degradation, pollution, climate change, and global warming). Interestingly, research has found that, often, the burdens of climate change most directly affect countries with the lowest greenhouse emissions. So, if a country is going to burn fossil fuels, and produce these negative externalities, the thinking is that they should pay for them.

The carbon trade originated with the 1997 Kyoto Protocol, with the objective of reducing carbon emissions and mitigating climate change and future global warming. At the time, the measure devised was intended to reduce overall carbon dioxide emissions to roughly 5% below 1990 levels by between 2008 and 2012. 

How It Works

Basically, each country has a cap on the amount of carbon they are allowed to release. Carbon emissions trading then allows countries that have higher carbon emissions to purchase the right to release more carbon dioxide into the atmosphere from countries that have lower carbon emissions.

The carbon trade also refers to the ability of individual companies to trade polluting rights through a regulatory system known as cap and trade. Companies that pollute less can sell their unused pollution rights to companies that pollute more. The goal is to ensure that companies in the aggregate do not exceed a baseline level of pollution and to provide a financial incentive for companies to pollute less. 

Carbon Trade Critiques

Carbon emissions trading has been widely and increasingly criticized. It's seen as a dangerous distraction, and a half-measure to solve the large and pressing issue of global warming. There have also been reports of corruption. 

Despite this, carbon trading remains a central concept in proposals to mitigate or reduce climate change and global warming