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Carbon trading

Launched through the Kyoto protocol in 1997, carbon trading is an approach to controlling pollution by providing economic incentives for reduced emissions of atmospheric carbon dioxide. Carbon trading takes two main forms: ‘cap-and-trade’ and ‘offsetting’. With cap-and-trade schemes, governments or intergovernmental bodies set an overall legal limit on emissions in a certain time period (a ‘cap’) and then grant industries a certain number of licenses to pollute (‘carbon permits’ or ‘emissions allowances’). Companies that do not meet their cap can buy permits from others that have a surplus (hence the ‘trade’). The cap is supposed to reduce emissions over time. The goal of the system is to help polluters meet ‘reduction’ targets in the cheapest way possible. Often linked with carbon offsetting schemes, or ‘emissions-saving projects’ such as building hydroelectric dams, the ‘cap-and-trade’ concept was created to compensate for continued pollution in industrialized countries in the North. While southern movements and some governments ask for repayment of the Ecological Debt (including the ‘carbon debt’), Northern governments offer at most ‘cap-and-trade’ schemes, including the UN’s clean development mechanism (CDM) and various initiatives that support reduced emissions from deforestation and forest degradation (REDD).

Carbon trading does not actually reduce emissions, but gives companies greater room to manoeuvre in addressing the emissions problem (hence the label of ‘flexible mechanism’). Companies exceeding their reduction commitments can sell their surpluses to those who have failed to clean up their activities adequately. Companies that want to keep on polluting save money, while in theory companies that are able to reduce beyond legal requirements will seize the chance to make money from selling their spare credits.

Nevertheless, this flexibility comes at a cost – what is cheap in the short term is not the same as what is effective in the long term or environmentally and socially just. The number of permits awarded is usually calculated according to existing levels of pollution (say, with a 10 or 20 percent reduction), which means that those who have polluted most in the past are rewarded with the greatest subsidy. This is usually called ‘grandfathering’. Hence, the observation that ‘this free gift of pollution rights to some of the worst industrial polluters amounts to one of the largest projects for the creation and regressive distribution of property rights in history’ (Gilbertson and Reyes, 2009). At world level, this is what happened in Kyoto in 1997: Annex I countries promised (if anything) a slight reduction of emissions compared to 1990, and they got in exchange a right to occupy the carbon sinks (oceans, soils and new vegetation) and the atmosphere. Moreover, they insisted in not doing internally the promised reductions but they wanted to use in part the CDM.

The UN-administered CDM is the largest carbon-offsetting scheme, with almost 1,800 registered projects as of September 2009, and over 2,600 further projects awaiting approval. Based on current prices, it was foreseen that the credits produced by approved schemes could generate over USD 55 billion by 2012. Although offsets are often presented as emissions reductions, they do not reduce emissions at source, but move ‘reductions’ to where it is cheapest to make them, which normally means a shift from Northern to Southern countries. Pollution continues at one location on the assumption that an equivalent emissions saving will happen elsewhere. The carbon ‘savings’ are calculated according to how much less greenhouse gas is presumed to be entering the atmosphere than would have been the case in the absence of the project. However, even World Bank officials, accounting firms, financial analysts, brokers and carbon consultants involved in devising these projects often admit privately that it is difficult to count the actual amount of carbon dioxide saved. Since carbon offsets replace a requirement to verify emissions reductions in one location with a set of stories about what would have happened in an imagined future elsewhere, the net result may well be an increase in greenhouse gas emissions!

Carbon offset projects have resulted in land grabs and the repression of local communities. Voluntary offsets, which give consumers in the global

North a means to make a payment to assuage their guilt about consumption, and companies the chance to present a green face to the public, run into similar problems. Offsets on the voluntary market exist outside UN -regulation.


Gilbertson, T. and Reyes, O. (2009) Carbon Trading: how it works and why it fails. Critical Currents, 7.

For further reading:

Hepburn, C. (2007). Carbon trading: a review of the Kyoto mechanisms. Annu. Rev. Environ. Resour., 32, 375-393.

Lohmann, L. (2006). Carbon trading. A critical conversation on climate change, privatisation and power. Uppsala, Dag Hammarskjöld Foundation.

Lohmann, L. (2001) Democracy or carbocracy? Corner House Briefing Papers No. 24. The Corner House, Sturminster Newton.

Sorrell, S., & Sijm, J. (2003). Carbon trading in the policy mix. Oxford Review of Economic Policy, 19(3), 420-437.

Welch, Dan, quoted by Nick Davies, The inconvenient truth about the carbon offset industry, The Guardian, June 16, 2007

This glossary entry is based on a contribution by Julien Francois Gerber

EJOLT glossary editors: Hali Healy, Sylvia Lorek and Beatriz Rodríguez-Labajos

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