Have you ever heard about Carbon Trading?

Article on the Occasion of COP21 by Sina Gösele

Have you ever heard about Carbon Trading? Well, if not, it is about time! This weekend a big conference about climate change with leaders from all over the world will take place in Paris. Maybe you have already seen the hashtag COP21. The yearly event is the successor of for example the meeting in Kyoto, where the Kyoto protocol was signed in 1997. It is incredibly important that our world leaders find a compromise, make concessions and sign a binding agreement to stop climate change. COP21 is our last chance to limit global warming to 2°!

What is Carbon Trading?

In the EU, Carbon Trading plays a big role in order to limit Carbon Dioxide Emissions and they started the first and largest allowance trading system in 2005, which is called Emissions Trading System (ETS). The trick is to create a financial incentive for companies to cut their emissions.

How does it work?

Basically, the EU limited the amount of carbon emissions a company can emit each year. This is called a “cap”. They created a currency in order to control the emissions: An allowance of one ton of CO2, also called carbon units or carbon credits. If a company emits more greenhouse gases than it owns carbon units, the company will face heavy fines. However, there are also companies where cutting emissions is cheap and easily done, so they have carbon units left over which can be used next year or be sold to the company which needs more allowances. In some sectors it is pricey or impossible to cut emissions such as the electricity generation sector. Therefore, companies can purchase carbon credits from companies that have some left over and pay the others to make extra reductions. The whole system is called “Cap & Trade”.

Advantages and Disadvantages

This system works because some companies save money and others earn money with carbon units and let’s be honest: In business, it’s all about profit. Moreover, it guarantees that emissions are reduced where it is the cheapest because there is a lot of flexibility. Furthermore, emissions can be cut step by step by simply giving out less and less allowances each year. This allows companies to adapt slowly and making investments over a long period of time. Since the carbon market works as any other open market, the prices for carbon units will depend on supply and need. Over the time, the supply will shrink and emitting greenhouse gases will become more expensive.

Important to mention is, that “cap and trade” is only helpful if there is a strong, regulating cap on the emissions and if the cap is reducing step by step. Therefore, we need governments which are willing to strengthen the cap in the required way for tackling the problem.

However, the industries which rely completely on fossil fuel so far like electricity generation, steel, iron, oil and gas, are provided with the wrong incentives. Our mass consumption of fossil fuels is the main reason for increasing greenhouse gases in the atmosphere and therefore global warming. Carbon Trading allows these industries to delay the structural changes they urgently need in order to improve by buying cheap carbon units. That is not acceptable because we need change now! We have to reorganize how electricity is produced and use modern technology to become independent from fossil fuels.
Politicians often argue that forcing these industries to do these structural changes would be a huge political conflict during nothing would change and it was therefore better to choose to compromise now and find a painless way.

However, is there really a painless way? In my opinion, structural changes will have to take place and putting them off will only make it more expensive on the long run. Therefore, we need this political discussion and yes, it will be painful, but it will probably be less painful for our climate than waiting.

Sources:
http://ec.europa.eu/clima/policies/ets/index_en.htm
https://www.youtube.com/watch?v=oKQ8GW6iblQ