How does carbon trading work?
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The idea behind carbon trading is that the use of fossil fuels has negative effects which the producers and consumers of fossil fuels do not experience.
For example suppose you need a certain amount of energy to run a factory and you have two options to obtain it. One is extremely clean wind turbines with minimal environmental impact, while the other is a coal power plant that belches smoke and poisons the water. The coal power is slightly cheaper.
What do you pick? Generally speaking companies would pick the coal power because their goal is to make money, not save the environment via charity. Carbon trading aims to provide an incentive to behave responsibly by making companies bear some cost for their carbon emissions.
To do this the government would typically do a process called “cap and trade”. The total amount of emitted carbon will be capped to some maximum amount and vouchers for fractions of that amount sold to the open market. If you want to burn a load of coal and emit tons of carbon then you will need to buy vouchers for that amount which you later turn in to the government. But the key idea here is that anyone can buy and sell these vouchers meaning not only is there money to be saved by emitting less carbon, but also potentially money to be made.
In the previous example the factory which is already running off coal power can see that the energy itself is still less expensive from coal, but needing to buy the carbon vouchers makes it more expensive. Or even if they are issued the vouchers at basically zero cost, they can make more money by reducing their emissions by shifting to wind energy and selling their unneeded vouchers on the open market. That is what carbon trading is.
Every company has a limit on how much co2 emissions are allowed to to emit so if one company is below that value they can sell their surplus of the limit to another company so that „both profit“. The one that has less emissions gets money while the other company doesn’t have to fear restrictions imposed on them for missed climate goals etc.
Realistically speaking it’s counterproductive to the whole point of these limits which would be reducing co2 instead it is just a matter of having enough money as a company to do what you want.
It’s a capitalist way of trying to combat climate change, which doesn’t take into account that capitalism seeks infinite growth in a world with limited resources and it encourages overproduction and overconsumption, but oh well…
Ignoring the actual source of the problem, it’s actually really interesting economically. Something that capitalism does the best is specialization/efficiency. You have a job, let’s say nurse, that’s in theory the thing you are the best at. You become better at it, John focuses on being a barista, Laura focuses on singing, etcetera. This leaves us with a better healthcare, better coffee, and better music than if everyone tried to do everything by themselves.
So, going back to the topic. The government says “Coca-Cola, you are producing 10 billion plastic bottles a year, you are emitting 20 tons of CO2, you gotta get that number down to 15 tons”. This of course doesn’t address the question of why it’s producing 10 billion plastic bottles in the first place, but oh well. Reengineering bottles facilities, finding new materials, etcetera, would cost a lot of money, time, expertise, etcetera. So, we give Coca-Cola the option to just purchase carbon credits. Another company will focus on taking CO2 out of the atmosphere. They only do this, this all they do, so they get better at it. They remove 5 tons of CO2, they create a coupon that’s worth -5 tons. Coca-Cola buys it. Coca-Cola tells the government “I still emitted 20 tons but I got this -5 coupon so it counts as 15”. The government says okay.
Let’s say that you are king of some region. As king you decide one morning to carefully measure everyone in your kingdom’s carbon production for the month of June. After that you announce that everyone must reduce their carbon emissions by 5% from their figure in June 2024. In September, one of your royal advisors comes to you to report that while some people have easily reduced their output by 5% others are really struggling to do the same and their reductions are creating many other problems.
Since you would be a good king, you think about this for a while and decide that rather than requiring that everyone reach the same 95% of their output last year level, what you really want is for the total to be 95% of last year’s level but you don’t care who makes the cuts, so someone might cut their output by 10% or 20%, and others may not cut at all. Carbon trading is how the people who don’t cut pay the people who cut their emissions by 20% for effectively making both of their required reductions.
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