Trading Carbon

 

What Makes Trading Carbon Different?

Trading carbon is unlike trading any other commodity. There are several reasons for this, not least the fact that in the countries that agreed the Kyoto protocol, the commodity known as carbon actually represents units of 6 different greenhouse gases.

The complexity, however, does not end there, in fact, this is just the beginning. Aside from the levels of allowable emissions that are provided as units to countries which, if unused, can be traded - are a number of other types of unit that can also be traded. These other types of unit are generally created via an emissions reduction scheme of some kind or
through a verified project which counteracts the effects of emissions.

Are all Registries and Carbon Markets Governed by Kyoto?

Not all registries are the same, and not all markets are governed by the Kyoto Protocol, there are a number of markets that are bound by law – these are called compliance markets. A good example of this is that there are a number of initiatives in the USA that are established by State Law, such as the California Global Warming Solutions Act, 2006.

• The Compliance market(s) - those that are required to report on, manage and reduce their emissions as governed by either local or international law and undertake trades as a result
• The Voluntary Market- those that opt to participate in a scheme or schemes for reasons that might include corporate social responsibility.

How Do Voluntary Markets Work?

The voluntary markets, generally speaking, work in a very similar way to the compliance markets in that they work on a unitary basis and also include registries which allow the recording of trades and verification of units. The critical difference is that there is no enforced cap on emissions so there no levels of allowed emissions and no units resultant from that allowance. Perhaps the best known registry in the voluntary sector is the VCS registry.

How Are Emissions Reduced / Offset?

Emissions can be reduced or offset in many ways and can range from installing more energy-efficient lighting, changing production processes to investing in a project that plants more trees. In order for these to be submitted to a registry and counted as a reduction or offset, the benefits need to be quantified in terms of units and validated. As such, before any project can be registered, it has to undergo a rigorous issuance procedure which requires all projects to demonstrate an emissions reduction in excess of what would otherwise have occurred. Once the issuance process is complete, the units are given unique numbers which enable them to be identified and tracked for their lifetime.

How Do Registries Work?

Registries are the principal place where units are validated measured, monitored, managed, reported and, in some cases retired. The registry tracks and validates units using the unique numbers assigned which ensures that they are counted only once. This provides a level of surety in the trading process as it validates that what has been traded is genuine and hasn’t been retired. In addition to this, the EU-ETS registries transfer information to the International Transaction Log (ITL) which is held by the UNFCCC Secretariat.