The Carbon Market

A booming trade in ‘carbon credits' has emerged from the greenhouse gas emission targets set by the Kyoto Protocol in 1997.


Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. This means that carbon becomes a cost of business and is seen like other inputs such as raw materials or labour. A business would buy the carbon credits on an open market from organizations that have been approved as being able to sell legitimate carbon credits.

As emission levels are predicted to keep rising over time, it is envisioned that the number of companies wanting/needing to buy more credits will increase, which will push the market price up and encourage more groups to undertake environmentally friendly activities that create carbon credits for them to sell. Another model is that companies that use less than their quota can sell their excess as ‘carbon credits'. In effect the buyer is being fined for polluting, while the seller is being rewarded for having reduced emissions. The cap on emissions for each polluter is reduced over time, aiming to reduce the national emissions.

The international political response to climate change began with the United Nations Framework Convention on Climate Change (UNFCCC) adopted in 1992.
The Kyoto Protocol to the Convention, adopted in 1997 by more than 170 countries, strengthened the UNFCCC by committing many industrialised countries and economies in transition, to individual, legally-binding targets to limit or reduce their overall emissions of greenhouse gases by at least five per cent below the 1990 levels of emission during the period 2008-2012.

It also, for the first time, introduced a means for developing countries to get involved in climate change mitigation, enabling a market-based solution to an environmental problem.

The Kyoto Protocol approved the use of three “flexible mechanisms”:

Emissions Trading, allowing the international transfer of national allocations of emission rights between different countries The Clean Development Mechanism (CDM), which allows for the creation of Certified Emission Reduction (CER) credits through emission reduction projects in developing countries, regulated by the CDM Executive Board, andJoint Implementation: the creation of emissions reduction credits undertaken through transnational investment between countries and/or companies. These are generally known as ‘carbon credits'.

The Koyoto Protocol is one of five major trading systems. In the United States a number of cap-and-trade emissions trading systems are in place such as the nationwide SO2 trading system, the Emissions Reduction Market System in Illinois, as well as systems in New York and California.

The European Union Emission Trading Scheme is the largest multinational, greenhouse gas emissions trading system in the world. Created in conjunction with the Koyoto Protocol, it commenced in 2005 and contains the only mandatory carbon trading program. All 27 EU member states participate. 

The Australian Carbon Trading Scheme will be introduced in 2012 to reduce emissions. Another is the Green Tags or Renewable Energy Certificates system that allows the trading of transferable rights for renewable energy