What is a 'Carbon Trade'

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

BREAKING DOWN 'Carbon Trade'

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 effect 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

 

RELATED TERMS
  1. Carbon Dioxide Tax

    A carbon dioxide tax is paid by businesses and industries that ...
  2. Carbon Credit

    A carbon credit is a permit allowing the emission of carbon dioxide ...
  3. Montreal Carbon Pledge

    The Montreal Carbon Pledge is a commitment by investors to measure ...
  4. Kyoto Protocol

    An international agreement that aims to reduce carbon dioxide ...
  5. Carbon Disclosure Rating

    A carbon disclosure rating is a numerical score that shows the ...
  6. Cap And Trade

    Cap and trade is a regulatory system designed to provide a profit ...
Related Articles
  1. Insights

    Could a Carbon Tax a Work?

    Nobel laureate and Clinton adviser is pushing for a national tax on carbon dioxide emissions. Could a carbon tax work?
  2. Investing

    The Largest Oil Companies Make a Pledge to Climate Change

    Here is how ten of the world's largest oil companies prepared for the UN climate change summit happening in Paris this month.
  3. Insights

    The 5 Countries That Produce the Most Carbon Dioxide (CO2)

    Learn about the top five countries, China, the United States, India, Russia and Japan, that are the largest contributors to carbon dioxide emissions.
  4. Insights

    The Economics Of Solar Power

    Even with the massive strides made in technological innovation, sustainable energy has failed to usurp traditional fossil fuels.
  5. Insights

    4 Things to Know About the Future of US Energy

    The fracking revolution has underpinned the U.S. energy industry in recent years, with positive trends likely to continue into the next decade.
  6. Investing

    How Does the Volkswagen Scandal Affect GM? (GM, VOW.DE)

    Monitor the reaction of Chinese consumers to the Volkswagen emissions scandal. It could significantly boost the market share of General Motors in that nation.
  7. Investing

    BlackRock: Investors Need to Heed Climate Change

    BlackRock sees climate change as presenting both risks and opportunities for investors.
  8. Investing

    Trump Vs. Investors: Funds Dump Fossil Fuel Assets

    Funds with $5 trillion in assets are divesting fossil fuel holdings, twice the amount reported in 2015. A look at who is selling
  9. Investing

    AirBnB Home-sharing is Good for the Planet

    New Airbnb study claims home-sharing is greener travel and can contribute to COP21 commitments for reduced GHG emissions in the United Stated and Europe.
  10. Investing

    PepsiCo’s Unexpected Partnership (PEP)

    PepsiCo partnered with TakePark and wants to make food Better for All. Details here.
RELATED FAQS
  1. What external factors can influence EBITDA margins?

    Learn what external factors influence EBITDA margins, such as consumer preferences, laws, inflation or deflation, price movements ... Read Answer >>
  2. What are the main substitutes for oil and gas energy?

    Read about some of the major substitute sources of energy that compete with fossil fuels – oil, natural gas and coal – in ... Read Answer >>
  3. How do government regulations impact the oil and gas drilling sector?

    Find out how government regulation of the oil and gas sectors is often positive for the large companies, but may be negative ... Read Answer >>
  4. How is absorption costing treated under GAAP?

    Read about the required use of the absorption costing method for all external reports under generally accepted accounting ... Read Answer >>
  5. What indicators are used in exchange rate forecasting?

    Learn what economic indicators are most widely used to forecast a country’s exchange rate and how various foreign exchange ... Read Answer >>
Trading Center