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.
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