When a company exceeds its emissions limit, it can buy credits from a company that has excess credits.
Carbon trading is a practice designed to reduce overall emissions of carbon dioxide, along with other greenhouse gases, by providing a regulatory and economic incentive. In fact, the term “carbon trading” is a bit misleading, as various greenhouse emissions can be regulated under what are known as cap-and-trade systems. For this reason, some people prefer the term “emissions trading” to emphasize the fact that much more than just carbon is being traded.
This practice is part of a system that is colloquially known as “limit and trade”. Under a cap-and-trade system, a government sets a national target for total greenhouse gas emissions over a given period of time, such as a quarter or a year, and then allocates “credits” to companies that grant them. allow to emit a certain amount of greenhouse gases. If a company cannot use all of its credits, it may sell or trade those credits with a company that is afraid of exceeding its allowance.
Carbon trading provides a very obvious incentive for companies to improve their efficiency and reduce their greenhouse gas emissions, turning those reductions into a physical cash benefit. In addition, it is a disincentive to inefficiency, as companies are effectively penalized for not meeting emissions targets. In this way, regulation is largely carried out by economic means, rather than draconian government measures, encouraging people to get involved in carbon trading because it is potentially profitable.
As a general rule, carbon trading is paired with a general attempt to reduce carbon emissions in a country over a long period of time, meaning that each year, the number of available credits will be reduced. By encouraging companies to become more efficient in advance, a government can often achieve emission reduction targets more easily, as companies are not expected to change practices overnight, and the carbon creates much more flexibility than setting basic levels of coverage.
In some countries, carbon exchanges have been opened, operating much like stock exchanges. These organizations facilitate the exchange of carbon credits, ensuring they flow smoothly through the market, and provide standard fixed prices for the credits, based on market demand and overall economic health. In some cases, individual citizens can also participate in carbon trading, buying credits to offset their own greenhouse gas emissions, and some advocates have suggested that carbon trading should be formally expanded to all citizens, encouraging global engagement. and individual in reducing greenhouse gas emissions.