“Carbon Trading” is in its infant state but the kind of growth this market is experiencing is outstanding. Besides the fact that “Carbon” will become the single biggest commodity ever traded, it will provide solutions to a common problem ‘Global Warming’. However, Emission trading is a market-based approach to regulate pollution by providing economic incentives for achieving reductions in the emissions of pollutants.
Let us understand how this whole mechanism works. A central authority, which is usually a government body sets limit, or cap on the amount of pollutants that can be emitted. This cap is sold to firms in the form emission permits, which gives them the right to discharge a particular volume of a specific pollutant. The firm needs to hold a number of permits also known as ‘Carbon trading’ equivalent to their emissions. The total number of permits a company can hold cannot exceed the cap, thus restricting the total emission to that level. Therefore, those firm that need to increase their emission permits must buy permits from those who require less permits.
The transfer of permits is known as a trade, the buyer pays a charge for polluting while the seller is rewarded for reduced emissions. In theory, those who can reduce emissions most cheaply will continue to do so resulting in less pollution with lower cost to the society. There are various trading programs in various air pollutants, such as European Union Emission Trading Scheme, which works for mitigating dangerous climate change. In the US, there is a national market to reduce acid rain and there are regional markets for nitrogen oxides.