Carbon Trading

Carbon Trading is a financial tool developed by Governments in the European Union, which allows Governments to control the supply of carbon permits, and which aims to discourage the burning of oil and coal.

If a company needs more carbon permits, because it emits more CO2 than it have been allocated permits to do, then this company can buy more permits, through the ETS, from another 'green' company that has a surplus of carbon permits.

A carbon permit to emit one metric ton of CO2 was at the launch of ETS worth Ł7. However, this rose quickly to Ł29 in July 2005. After the first five weeks of operation as total of 7 million tons worth of permits changed hands.

Carbon trading is also part of the Kyoto Protocol. In an attempt to reduce carbon emissions, the main cause of global warming and climate change, Kyoto participants have agreed to their own legally binding target, which will see a collective reduction of carbon dioxide (CO2) to 5% below 1990 levels by 2012. Under the Kyoto agreement, carbon trading comes into effect in 2008, when Kyoto countries will start to buy and sell carbon permits to each other.

On the 1st January 2005, the European Emission Trading Scheme (ETS) was launched. The ETS is the worlds first and only trading scheme that enables carbon permits to be bought and sold in line with any other commodity in the world.

In the UK, carbon permits are managed by The Carbon Trust, which was set-up by the UK Government in 19??. The trading of carbon permits in the UK is currently voluntary, but this will change in 2008 - see below.

The argument goes that carbon trading creates a strong financial incentive for companies to reduce their energy use and CO2 emissions, because they either will not have to buy permits from 'greener companies' or may even have permits to sell on the ETS.

Carbon trading provide Governments with a powerful financial tool that could be used to drive down CO2 emissions, if the annual allocation of permits to different industry sectors are reduced over a period 5-10 years - in line with industry becoming more energy efficient.

In their effort to reduce CO2 emissions, Governments have allocated carbon permits to many different industries, such as power stations, that emitt high quantities of carbon dioxide.