What is the "carbon market" exactly?

The basic idea that companies should be required pay when they pollute the atmosphere has been around since at least 1920, and the idea that this "price" can be created by a market in emissions was developed in the 1960s.   In a typical "cap and trade" scheme, the government issues a total number of permits, or allowances, which give companies the right to emit pollution. Because fewer allowances are issued than companies need, allowances are valuable and trade with a positive price. The price provides firms with an incentive to reduce their emissions when this is cheaper than purchasing allowances.  Over time, the number of allowances in circulation is lowered and emissions are reduced.

So the basic theory of emissions trading has been around for almost four decades.  Trading of sulphur dioxide (SO2) and nitrogen oxides (NOx) began in the United States in the 1990s.  It was greeted with a mixture of enthusiasm and scepticism but is now viewed by most as a success, because emissions were reduced at extremely low costs. Carbon trading, which refers to the trading of emissions of six major greenhouse gases including carbon dioxide, is more recent. The European emissions trading scheme ("EU ETS") is the largest scheme to date, although it is by no means the first, and it only caps Europeís carbon dioxide emissions from fixed industrial installations, leaving the other five major greenhouse gases, and the other sectors, to be addressed through other policy measures.

Before the EU ETS, several governments had implemented carbon trading schemes, including the United Kingdom in 2002 and the Australian state of New South Wales in 2003. The 1997 Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) also provides for carbon trading from 2008 to 2012. As a result of the Kyoto Protocol, we now have major international markets in carbon. In 2006 alone, the international carbon markets were estimated to have turned over $30 billion. Any analysis of the bigger picture suggests that this is just the tip of the iceberg if humanity is going to achieve the emission reductions necessary to avoid dangerous anthropogenic interference with the climate, which is also economically sensible.

The History of Carbon Market

Climate risks warrant a dramatic shift to a low-carbon society. The world recognized the challenge over a decade ago with the signature of the United Nations Framework Convention on Climate Change in 1992. The agreement of the Kyoto Protocol in 1997 marked a hesitant and imperfect first step on the path to reducing emissions, whereby developed economies would reduce emissions by about 5% by 2008-2012 compared with emissions in 1990.

The Kyoto Protocol entered into force in February 2005, and the European emissions trading scheme opened in January 2005, establishing the world's largest carbon market. This market establishes a carbon price, thereby providing an incentive for regulated companies to reduce their emissions. They can do so at home in Europe, or purchase credits for emissions reduced elsewhere in the world.

But this is not enough. Investment requires a long-term, relatively reliable carbon price signal. Allowances to companies within the market have been rather loose, and for a variety of reasons the market is not functioning as effectively as it could be. Substantial changes to the framework are required for the next regime post 2012, and the directors of Climate Bridge are committed to strengthening government policy to reduce emissions. Our research has been important in providing conceptual insights to push government policy in the right direction.

Recognizing that government incentives around the world are currently inadequate, far-sighted businesses are also forging ahead voluntarily and finding innovative ways to reduce or offset their emissions. Climate Bridge is committed to helping business leaders to leap ahead of regulatory requirements and achieve carbon neutrality. Individuals and businesses that are carbon-neutral can sleep soundly at night, knowing that if everyone did as they did, the planet would be safe.

Corporate leaders now recognise that shareholder value is damaged by greenhouse gas emissions. Indeed, with corporations increasingly being judged on their reputation for "corporate social responsibility" as well as their profit-making potential, the 2006 McKinsey Global Survey of Business Executives found that environmental issues are expected to be the third most important driver of shareholder value in the next five years. As the tremendous importance of environmental issues has become increasingly clear, new markets for reducing emissions have rapidly emerged. These markets are either "compliance" markets, or "voluntary" markets. Climate Bridge grew out of its expertise in the voluntary market, and now operates in voluntary and compliance markets around the world.