World Carbon Credits Market
World Carbon Credits Market can either be an emissions allowance or an offset of emissions. There are three mechanisms under the Protocol that a country or an operator in a developed country can use to accumulate greenhouse gas reduction credits.
1. Joint Implementation (JI):
This is a mechanism that allows an operator in a developed country with a high cost of greenhouse gas reduction to avail credits, by setting up a project in another developed country.
2. Clean development Mechanism (CDM):
Under this arrangement, an operator in a developed country can sponsor a project in a developing country where the cost of greenhouse gas reduction is lower, but the adverse impact on the environment is the same. Both countries benefit - the developed country gets credits, and the developing country gets capital investment in clean technology.
3. International Emissions Trading (IET):
Countries with a shortfall can try to cover them by trading in the international carbon credit market. Countries with capped emission commitments under the protocol can buy from countries with surplus credits.
Most transactions performed by operators, who have quotas set by the governments of the countries in which they operate, rather than by the governments themselves.
Each unit of the allowances (Certified Emission Reductions, or CERs) that traded privately or in the open market at the prevailing prices is the equivalent of one metric tonne of CO2 emissions. The CERs transferred between countries, with every transfer required to be ratified by the UNFCCC.
There are Climate Exchanges set up to enable Spot Markets for transactions. Futures and Options Markets have also established which facilitates pricing, as well as helps, maintain liquidity.
Prices for carbon emissions quoted in Euro for every tonne of carbon dioxide or equivalent; other greenhouse gases cited as carbon dioxide multiples in proportion to their relative global warming potential.
Four exchanges that trade in carbon allowances, currently, are Nord Pool, PowerNext, the Chicago Climate Exchange, and European Climate Exchange. Emissions abatement, offsetting, and sequestration programs offer companies the opportunity to generate credits that sold.
The emissions trade, with a worth of approximately EUR30 billion, and expected to top EUR1 trillion in a decade, is among the fastest-growing segments in financial services, and carbon is expected by experts to become the world's largest commodity market, shortly. A reasonable expectation as market price will ride on supply and demand rules to attract more groups into the trading circle.
Emissions will, henceforth, appear on the balance sheets of businesses either as assets or liabilities, depending on whether a particular company has a surplus or a deficit in carbon credits. Thus they will become part of the cost of doing things.
A company that emits 50,000 tonnes of greenhouse gases a year could get set a quota by the government of the country of its location of, say, 40,000 tonnes. Then, the company is required either to reduce emissions by 10,000 tonnes a year, or else, buy carbon credits to the extent or offset the same. (One way of offsetting emissions is to plant a certain number of trees for every carbon credit bought, under CDM).
A cost analysis taking the cost of emissions into account may reveal that it is better for the company to buy credits on the open market than to opt for clean machinery.