Carbon Trading – by Varun Pandey *

As the world edges slowly to the brink of century old regime of en masse fossil fuel consumption, with the contemporary global issues dominated by the call for climate conservation, there is a need to address a pretermitted issue which seems to have been overlooked by the world leaders as they aim to encapsulate every remote matter of relevance whilst formulating policies to preserve life on earth. In their crusade against curtailing the massive greenhouse gas emissions, global policy makers have introduced and enacted revolutionary reforms including the Carbon Trading regime.

The United Nations Framework Convention on Climate Change (UNFCCC), ever since its inception has sought to stagnate the concentrations of greenhouse gases in the environment to a degree that may prevent a fatal interaction of anthropogenic activities with the climate system. Its controversial extension, The Kyoto Protocols further accentuated the objective by imposing respective conditions on countries after bifurcating them on the basis of economic prowess and development into Annex-1 countries (developed nations) and Non Annex- 1 countries (developing nations), the protocol stipulated that the Annex 1 parties would aim to cut their GHG emissions to approximately 5% than the 1990’s levels by 2008-12. . However, the guidelines for the “developing countries” were largely disputable, according to the convention the non- Annex 1 countries did not have the meet the emission reduction targets but were to be awarded with pollution reduction credits if they allowed industrialized nations to finance projects that would reduce emissions within their borders (the countries partaking such investment would be rewarded too), furthermore, if a country has achieved its GHG emission target then it can sell credit for the surplus allotment to another nation, which can use  the acquired credit to meet its own treaty obligation. The protocol was officially adopted in the 3rd Conference of Parties (COP) unequivocally in 1997 and was signed by 150 nations.

A procedure quite synonymous to the Clean Development Measures as purported by the Kyoto Protocol is of Carbon Trading, which has found utmost application in the European Union as the European Union Emission Trading System (EU ETS) happens to be the single largest market for carbon trading in the world. Carbon Trading is described as a process by which countries can buy or sell official permits to emit carbon dioxide[1] and has managed to solidify its role as the singular most effective policy for the EU to dissuade nations from making large scale carbon emissions. In theory the carbon trading mechanism works on the principle of putting a price tag on polluting the environment, and on the assumption that in a profit driven economy, business ventures would deter engaging in non eco friendly activities for the sake of maintaining cost efficiency. The ‘cap and trade’ procedure allows multinationals to bid for a permit to emit GHG’s and abide by the permits, unfortunately the provisions stated in the Kyoto Protocol deterred this trend from materialising since it capped the industries on a country-to-country basis and initially the cap was allowed free of charge and owing to the naivety of the idea, a practice which was infamously called as grandfathering. It is further accentuated in the carbon trading mechanism that merely setting a cap wasn’t the initial idea, since a regular checks and inspection on whether the signatory countries are abiding by their emission limits was equally detrimental to the smooth functioning of the policy, something that was emboldened in the fundamentals of carbon trading.

Offsetting roadblocks and abysmal application procedure of the carbon trading system has led to the practice being chastised vehemently on a global scale, for instance the EU-ETS approved numerous permits from 2005-07, deluging the number of permit holders in the carbon trading market  and defeating the purpose of confining emission levels. Economically capable and developed nations claim unattainable emission reduction targets were handed to them often accusing the UNFCCC of deliberately imposing inadequate emission reduction goals, limited restrictions and social protections on the carbon trading permits form the other part of argument against carbon trading with the coup de grace being the over generous grandfathering of industries and fatal leniency in handing out carbon emission permits.

However, the era of command and control is a thing of the past and world economists have actively supported battling environmental degradation via economic policies and discouraging intense carbon emission by the method of cap and trade. The contemporary legal fraternity throughout the world has advocated for stringent regulations and improved application mechanisms to be installed in place of redundant legal provisions governing the carbon trading market.


*Varun Pandey – University of Petroleum and Energy Studies, Dehradoon.


Leave a Reply

Your email address will not be published. Required fields are marked *