When a company exceeds its emissions limit, it can buy credits from a company that has excess credits.
Carbon trading is a practice designed to reduce total carbon dioxide emissions, along with other greenhouse gases, by providing a regulatory and economic incentive. In fact, the term “carbon trading” is a bit misleading, as various greenhouse gas emissions can be regulated under what are known as cap-and-trade systems. For this reason, some people prefer the term “emissions trading” to emphasize the fact that much more than carbon is being traded.
This practice is part of a system that is colloquially known as “limit and trade”. Under a cap-and-trade system, a government sets a national goal for total greenhouse gas emissions over a set period of time, such as a quarter or a year, and then allocates “credits” to the companies that give them. certain amount of greenhouse gases. If a company cannot use all of its credits, it may sell or trade those credits with a company that is afraid of exceeding its allocation.
Carbon trading provides a very obvious incentive for companies to improve their efficiency and reduce their greenhouse gas emissions, turning those reductions into a physical monetary benefit. In addition, it is a disincentive to inefficiency, since companies are effectively penalized for not meeting emissions targets. In this way, regulation is largely carried out by economic means, rather than draconian government measures, encouraging people to get involved in carbon trading because it is potentially profitable.
As a general rule, carbon trading is combined with a general attempt to reduce carbon emissions in a country over a long period of time, which means that each year the number of available credits will be reduced. By encouraging companies to be more efficient from the start, a government can often more easily achieve emission reduction targets, as companies are not expected to change practices overnight, and carbon creates Much more flexibility than setting basic coverage levels.
In some countries, carbon exchanges have been opened, which work in a very similar way to stock exchanges. These organizations facilitate the trading of carbon credits, ensuring that they flow smoothly through the market, and provide standard fixed prices for the credits, based on market demand and general economic health. In some cases, individual citizens can also participate in carbon trading, buying credits to offset their own greenhouse gas emissions, and some advocates have suggested that carbon trading should be formally expanded to all citizens, encouraging commitment. globally and individually in reducing greenhouse gas emissions. .