08 May 2007

Trading Pollution

What are all those carbon credits, offsets, and things?

There has been carbon trading for years: I'll give you a ducat for that coal, a riyal for that oil, a pew for that tree. This is commodity trading.

What is new is trading various derivatives related to the carbon in a fuel, the carbon dioxide emitted by a process, the production of renewable energy, or the sequestration or reduction of CO2 output.

In case you have been as confused as I have by all the permutations, here is a breakdown:

Emissions TradingCarbon CreditRenewable Energy CertificateCarbon OffsetCarbon Tax
"Cap and Trade" -- tradable right to exceed government-set quotaTradable permit to emit CO2 issued by a seller who is reducing CO2 emission."Green Tag" -- tradable evidence that electricity was produced by approved renewable sourcesTradable assurance that someone else has reduced CO2 emissions by a certain amount A tax paid to government based on carbon content of fuel
Transfers wealth from greater polluters to lesser polluters in a regulated system of allowancesTransfers wealth from carbon emitter to carbon emissions reducer or mitigator.Transfers wealth from electricity consumer buying from the grid to generator using renewable technology selling to the grid elsewhere.Transfers wealth from a CO2 emitter to owner of a project that reduces CO2 emissions. Project may sequester carbon, or produce energy by less carbon intensive means, or prevent the emission of carbon as from change in land use.Transfers wealth from users of fuel to the government.
Right to emit a given quantity of pollutant above allowanceRight to emit one tonne of CO2Essentially a premium paid above standard rates for production of electricity by renewable sources. Makes production by renewable means more profitable.Gives you the right to feel OK even though you are emitting CO2. May provide additional revenue to emission-reducing project.Puts a cost on the negative externalities associated with using CO2-emitting fuel. Makes reducing such use more economically attractive.

Any Questions?

These posts are thoughts that have occurred to us here at GCF Associates and Global Climate Fund. Feel free to contact us if you have any questions or ideas for future posts.

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