Anand S

When governments or businesses bring down trees to widen a road or set up a manufacturing faciity, they plant trees somewhere else as a measure of restoring the balance in our ecosystem. Some may view this step as mere tokenism, yet some see it as a tangible way to pay for their actions. A similar idea took root to compensate for damage to the environment through the use of fossil fuels.

Environmental pollution as a cause for global warming has long been accepted despite some naysayers being in denial. Countries, both industrialized and developing, have agreed over the years to set targets to individually reduce their emissions to arrest the rise in temperature of the planet. But there have been disagreements over funding and responsibility for reducing emissions. They put in place some mechanisms to gradually reduce emissions and monitor compliance with targets for emissions.

Carbon di-oxide is a greenhouse gas which absorbs and retains the sun's heat. There are other green house gases(GHGs) which are harmful to the environment because they also trap heat and push up the temperature. This impact is potentially irreversible impact on our climate and environment. The aim of policymakers is to try to stabilise the level of carbon in the atmosphere and keep the rise in global average temperature at 2 degree C. This is in direct

To achieve this change, we will have to effect a drastic change in how we consume energy, where we source it, and how we price it. It will necessitate a massive investment in new technologies and infrastructure. Some economic activities will be disrupted at great cost to some countries. But doing nothing can lead to catastrophic changes for the planet.

The governments negotiated a series of treaties starting with the UN Framework Convention on Climate Change and the Kyoto Protocol, to reduce the growth in emissions of carbon di-oxide, and to eventually replace the dependence on fossil fuels before it is too late. Among the many approaches proposed, a free-trade, market-based system called 'cap and trade' also known as carbon trading, became the central policy to induce reduction of emissions.

Carbon trading is a more sophisticated mechanism than a carbon tax or regulation and acts as an incentive to investment in renewable technologies. It is the process of buying and selling permissions to pollute. These permissions take two forms; permits and credits. The model used in all current carbon trading schemes is called 'cap and trade'. In this scheme of 'cap and trade' , a government or an inter-governmental body sets an overall legal limit on emissions (the cap) over a specific period of time , and grants a fixed number of permits to those releasing emissions. A polluter must hold enough permits to cover the emissions it releases. Each permit is considered equivalent to one tonne of carbon di-oxide equivalent.

Permits are to be sold usually in an auction so that polluters are forced to put a price on their emissions, and are motivated to reduce to a minimum the permits they seek. If one polluter does not use all its permits, it can trade them with another that has already used up all its permits and needs more to continue emitting beyond its legal limit. The reasoning is that polluters are punished because they have to pay for more permits, and those who invest in more efficient energy consumption are rewarded financially, because they can sell their unused permits. Thus the overall level of emissions is reduced.

It is only the cap that leads to reduction in emissions. The trading makes compliance with the cap less costly. Credits are a supplementary source of permission to pollute that can bought from other countries or industries outside the cap. Every industry incurs costs to reduce their emissions but they could more than make up for that cost by selling their unused permits. The purchase allows the emitter to exceed the emissions cap by paying someone else to reduce their emissions. Offsets do not reduce emissions, they merely replace them.