The carbon market can be divided into two: the voluntary market and the regulatory (compliance) market.
In the compliance market, carbon credits are generated by projects that operate under one of the United Nations Framework Convention on Climate Change (UNFCCC) approved mechanisms such as the Clean Development Mechanism (CDM). Credits generated under this mechanism are known as Certified Emissions Reductions (CERs).
In the voluntary market, carbon credits are generated by projects that are accredited to independent international standards such as the Verified Carbon Standard (VCS). These credits are known as Verified Emission Reductions (VERs).
Carbon credits are an immediate answer to reducing the amount of Green House Gas (GHGs) emissions in the atmosphere. The generation and sale of carbon credits funds carbon projects which would not have gone ahead. Carbon credits also help lower the costs of renewable and low carbon technologies as well as assisting in the technology transfer to developing countries.
Carbon Trade Exchange supports the trading of both voluntary and compliance credits. It is important to note that carbon credits differ from carbon allowances although the term carbon credit is interchangeably used to represent both. Although in most cases they both represent one tonne of carbon dioxide equivalent, allowances do not originate from carbon projects but are allocated to companies under a ‘cap and trade’ system such as the EU Emissions Trading Scheme – therefore, they represent the right to emit.
Mandatory Carbon Trading
The Kyoto Protocol, an international treaty on climate change that came into force in 2005, dominates the mandatory carbon market. It serves as both a model and a warning for every emerging carbon program.
In the early 1990s, nearly every member state of the United Nations resolved to confront global warming and manage its consequences. Although the resulting United Nations Framework Convention on Climate Change (UNFCCC) international treaty recognized a unified resolve to slow global warming, it set only loose goals for lowering emissions. In 1997, the Kyoto amendment strengthened the convention.
Under the Protocol, members of the convention with industrialized or transitional economies receive specific reduction targets. Member states with developing economies are not expected to meet emissions targets -- an exception that has caused controversy because some nations like China and India produce enormous levels of GHG.
The Protocol commits members to cut their emissions 5 percent below 1990 levels between 2008 and 2012. But because the Protocol does not manage the way in which members reduce their emissions, several mechanisms have arisen. The largest and most famous is the European Trading Scheme (ETS).
The ETS is mandatory across the European Union (EU). The multisector cap and trade scheme includes about 12,000 factories and utilities in 25 countries [source: Europa]. Each member state sets its own emissions cap, or national allocation plan, based on its Kyoto and national targets.
Countries then distribute allowances totaling the cap to individual firms. Even though countries distribute their own allowances, the allowances themselves can be traded across the EU. Independent third parties verify all emissions and reductions.
There has been, however, some question as to whether the ETS has actually helped reduce emissions. Some people even call it a "permit to pollute" because the ETS allows member states to distribute allowances free of charge. The ETS also excludes transport, homes and public sector emissions from regulation. And as with all cap-and-trade schemes, governments can essentially exempt influential industries by flooding them with free allowances.
The ETS allows its members to earn credits by funding projects through two other Kyoto mechanisms: the Clean Development Mechanism (CDM) and Joint Implementation (JI). CDM allows industrialized countries to pay for emissions reduction projects in poorer countries that do not have emissions targets. By funding projects, countries earn certified emissions reduction (CER) credits to add to their own allowances.
The Kyoto Protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered into force on 16 February 2005. The detailed rules for the implementation of the Protocol were adopted at COP 7 in Marrakesh, Morocco, in 2001, and are referred to as the "Marrakesh Accords." Its first commitment period started in 2008 and ended in 2012.
In Doha, Qatar, on 8 December 2012, the "Doha Amendment to the Kyoto Protocol" was adopted.
Most of the world’s industrialized nations support the Kyoto Protocol. One notable exception is the United States, which releases more greenhouse gases than any other nation and accounts for more than 25 percent of those generated by humans worldwide. Australia also declined.
It's a concentrated effort to produce less waste and use more renewable energy. After reduction has reached its limit, or its comfortable threshold, carbon offsets can make up for the rest.
Carbon offsets are a form of trade. When you buy an offset, you fund projects that reduce greenhouse gas (GHG) emissions. The projects might restore forests, update power plants and factories or increase the energy efficiency of buildings and transportation. Carbon offsets let you pay to reduce the global GHG total instead of making radical or impossible reductions of your own. GHG emissions mix quickly with the air and, unlike other pollutants, spread around the entire planet. Because of this, it doesn't really matter where GHG reductions take place if fewer emissions enter the atmosphere.
Carbon offsets are voluntary. People and businesses buy them to reduce their carbon footprints or build up their green image. Carbon offsets can counteract specific activities like air travel and driving or events like weddings and conferences.
Some environmentalists doubt the validity and effectiveness of carbon offsets. Because the commercial carbon trade is an emerging market, it's difficult to judge the quality of offset providers and projects. Trees don't always live a full life, sequestration projects (for the long-term containment of emissions) sometimes fail and offset companies occasionally deceive their customers. And voluntary offsets can easily become an excuse to overindulge and not feel guilty about it.
Carbon offsets do, however, raise awareness about lowering the GHG world total.
Footprints offer clues about where we came from and where we're headed. Their impressions tell us something about the animals that leave them. But while actual footprints offer details on size, weight and speed, carbon footprints measure how much carbon dioxide (CO2) we produce just by going about our daily lives.
A drive to work, a flip of a light switch and a flight out of town all rely on the combustion of fossil fuels like oil, coal and gas. When fossil fuels burn, they emit greenhouse gases like CO2 that contribute to global warming. Ninety-eight percent of atmospheric CO2 comes from the combustion of fossil fuels [source: Energy Information Administration].
People concerned with the environment and global warming usually try to reduce their carbon output by increasing their home's energy efficiency and driving less. Some start by calculating their carbon footprint to set a benchmark -- like a weigh-in before a diet. A carbon footprint is simply a figure -- usually a monthly or annual total of CO2 output measured in tons.
Most people try to reduce their carbon footprint, but others aim to erase it completely. When people attempt carbon neutrality, they cut their emissions as much as possible and offset the rest.
Some companies have started to include footprints on their labeling. Carbon labels appeal to consumers who understand and monitor their own carbon footprints and want to support products that do the same. The labels estimate the emissions created by producing, packaging, transporting and disposing of a product. The concept is similar to life cycle analyses, the more intricate forerunner of carbon footprints. Life cycle analyses or assessments evaluate all of the potential environmental impacts that a product can have during its existence -- they're a more focused version of a carbon footprint.
But life cycle analyses require teams of researchers who plot and compile data from every aspect of production, transportation and disposal. Personal carbon footprints are less precise but still give a quick, general idea of CO2 output.