Carbon trading emerged as a regulatory mechanism to control CO2 emissions, and it has increasingly caught the fancy of governments and industries across the world. In carbon trading, carbon credits are bought and sold by industries and organizations across the globe under the innovative cap-and-trade system, where one credit permits the release of an equivalent of one thousand kilos of carbon dioxide and other greenhouse gases to the atmosphere.
The Kyoto protocol has fixed a cap on how much discharge can be allowed globally, which is later transformed into carbon credits, and each operator receives a certain amount of these credits. Organizations that are left with a stock of credits due to their adherence to greener alternatives can sell credits to companies that will fall into the high-emission segment for going above their authorized limits. High-emission operators are penalized for their excessive emissions by this monetary compensation for polluting the atmosphere.
So far market responses on carbon trading have been positive, with most big organizations across the globe opting for this emission-lowering method. This is because carbon trading allows them flexibility in their short-term and medium-term planning.
If the figures of the World Bank's Carbon Finance Unit are to be believed, then carbon trading is increasing very rapidly with each passing year. There has been an amazing increase from 41% to 240% in the carbon trading market between the years 2003 and 2005. Growth in the London centred carbon finance market has also been very remarkable, proving the fact that carbon trading is clearly a successful business strategy for many companies. Many states and industries in the US have also adopted carbon trading practices, even though the country is not a signatory to the Kyoto Protocol. In addition, the EU with its own carbon trading system has also been performing a major role in the carbon trading market.
However, some groups of people are not convinced about the effectiveness of carbon trading. The immense increase in the carbon trading business suggests that companies throughout the world are in fact more willing to purchase carbon credits rather than investing in low emission energy alternatives which has always been one of the goals of carbon trading. Thus, carbon trading has been a topic of debate in several parts of the world, and some specialists are of the opinion that alternatives like taxation on excessive carbon emissions is the more suited way to regulate the greenhouse gas emissions.
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