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Carbon trading, a market mechanism for tackling climate change

"Carbon emission trading," a scheme that allows market forces to reduce carbon dioxide emissions and tackle climate change, has drawn world-wide attention in recent years.

Many people hope such a scheme, which works through market mechanism, could effectively promote the development of a low carbon economy and hence solve the climate crisis we humans are facing today.

The emissions of greenhouse gases, including carbon dioxide, are not tradable goods as a matter of course. However, the U.N. Framework Convention on Climate Change (UNFCCC) signed in 1992 and the Kyoto Protocol adopted in 1997 provided legal prerequisite for the trading of carbon emissions.

The protocol introduced three flexible mechanisms for the developed countries to reach their emission reduction targets, namely, emissions trading, clean development and joint implementation mechanisms.

According to the UNFCCC and the protocol, the developed countries and developing countries shoulder "common but differentiated responsibilities" for climate change.

Under the convention and the protocol, developed countries would reduce their collective greenhouse emissions by 5.2 percent from 1990 levels during the first five-year commitment period 2008-2012.

Some developed countries, therefore, are setting a cap on total allowable carbon emissions, which means the carbon emission rights become scarce and hence a valuable asset.

Carbon trading could be carried out between different countries around the world as well as between various enterprises within a country, with an ultimate goal of controlling total carbon emissions and dealing with climate change.

Under such a scheme, an enterprise that intends to exceed the limits or "caps" set by the government may buy emissions credits from entities that are likely not to exceed the limits.

The mechanism has at least two effects, namely, serving as an incentive for enterprises as more emissions entail additional costs and less emissions mean extra profits, and helping curb the total emissions of carbon dioxide.


After the Kyoto Protocol came into force in 2005, global carbon trading has grown exponentially.

According to statistics from the International Emissions Trading Association (IETA), the market value of world's carbon trading reached 126.35 billion U.S. dollars in 2008, up 100.6 percent from 2007.

There are now more than 20 platforms for trading carbon in the world, with two main trade targets, namely, carbon emissions quota and related financial derivatives, and emission mitigation projects.

Major carbon trading markets in the world include EU Greenhouse Gas Emission Trading System (EU-ETS), UK Emissions Trading Group(ETG), Chicago Climate Exchange (CCX), and the New South Wales Greenhouse Gas Reduction Scheme.

The EU-ETS, which commenced operation in January 2005, is the largest greenhouse gas emissions trading scheme in the world. It implements a mandatory "cap and trade" system in 27 EU member countries.

Some 2.8 billion tons of carbon dioxide were traded in the EU-ETS in 2008, accounting for nearly 60 percent of the world's total, compared to 94 million tons in 2005.

The CCX, created in 2003, is the world's first voluntary carbon credit market, whose market size reached 100 million U.S. dollars in 2008.


Carbon trading is a financial activity that correlates closely with the real economy.

Through such a trading scheme, financial capital could go directly or indirectly into enterprises or projects to promote technological innovation, and company transformation and upgrading, which could ultimately reduce countries' reliance on fossil fuel and lower greenhouse gas emissions.

The World Bank predicted that global carbon trading could reach150 billion dollars in 2012. The New Energy Finance, a Britain-based research firm, said in a June report that the world's carbon trading market could reach 3.5 trillion U.S. dollars by 2020.

Countries around the world are all making active efforts to setup and improve carbon emission markets in a bid to gain a leading position in the sector.

The EU-ETS aims to further tighten emission targets and increase carbon emissions trading in the third phase, which runs from 2012 to 2020. The United States is planning for a federal carbon trading market. Australia, Canada and Japan are also working on setting up policy frameworks, which would pave the way for their domestic carbon emission markets.

China is also expected to start real emissions-trading businesses in 2010, said Gao Zhengqi, general manager of the Tianjin Climate Exchange, China's first national emission trading marketplace.

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