Issues with Carbon Credits in a worldwide economy

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A carbon credit is a value that has been assigned to reduce carbon emissions, it is an international precaution to control the increase of green houses gases. A carbon credit is equal to one ton of carbon dioxide or any other emitted gas depending on the market rules. Industrial emissions are the major source of green house gases especially industries that use fossil fuels to manufacture goods like steel, fertilizer, cement, textiles among others.

Greenhouse gases affect the ability of the atmosphere to trap heat making it absorb more heat, hence global warming occurs. Some of these gases include carbon dioxide, methane, nitrous oxide, and other hydro fluorocarbons.

The Intergovernmental Panel on Climate Change is an organization that was created to control industrial emissions, and it came up with the tradable permit system of carbons which they considered to be environmentally effective, as long as there were clear allocation mechanisms and a long term prices set. They say that, ¹“Policies that provide a real or implicit price of carbon could create incentives for producers and consumers to significantly invest in low-GHG products, technologies and processes.”

Emission allowances

Emissions trading, which is also known as cap and trade, is a market-based method used to manage greenhouse gases by creating monetary incentives for achieving reductions. However, there need to be a central organ that restricts the maximum level of noxious waste that can be released.

Companies who emit more are required to buy credits from those who emit a less from the set value. The emissions allowance or credits were introduced through the Kyoto protocol which sets limits or quotas on the amount of green houses gas that a country can emit. The Kyoto Protocol was formed in Kyoto, Japan, on 11 December 1997 and in 2001 its rules of operation were set in Marrakesh and came to be known as the “Marrakesh Accords.”

However, it formally took effect on 16^th February 2001. The accord is an environmental treaty passed by 170 countries in 1992 by the UN. Countries are assigned amount units of which each represents an allowance to emit one metric ton of carbon dioxide or other equivalent greenhouse gas and they are recorded in the national registry.

The units are controlled and sold by an organization or private operators from which businesses can buy them. ²“Operators that have not used up their quotas can sell their unused allowances as carbon credits, while businesses that are about to exceed their quotas can buy the extra allowances as credits, privately or on the open market”.

A credit is given to a company, organization or operator when it reduces its emissions of greenhouse gases beyond the set limit, or quota, by one metric ton. “The eventual trade in carbon credits is treated as emission offset, thus a rise in toxin release by the various firms can be set-off by the decrease from other firms.

For example, if a manufacturing firm releases 80 tons of carbon pollutants per year, but during the year it reduces its releases to 60 tons, the firm is granted 20 emission-allowance credits for cutting its general sum.”

However, if a cement factory, for instance, emits 20 tons of emissions annually and has predicted that it is likely to surpass its quota by one ton (5 tons total), it can obtain an emissions credit from the prior firm to cover for the increase.

Cost-effective methods of emissions control are achieved through the sale of allowances and the organizations can involve themselves in more environmentally secure activities or even invest in buying more credits.

Kyoto’s Flexible Mechanisms

Kyoto mechanisms under the protocol are meant to lower the costs of achieving emission reduction targets and presents a cost effective method of controlling carbon emissions in other countries especially developing countries. It enables sustainable development through technology transfer and investment and also motivates the private investors to put in to the management of emissions.

To be involved in the mechanisms countries must meet following rations: must be ratified under the Kyoto protocol, must calculate their assigned amounts in terms of tons of CO2 or its equivalent ,there must be a national system and registry for governing emissions and keep records, and they must file an annual report on the control of emissions.

These mechanisms include: Emissions Trading, the Clean Development Mechanism and the Joint Implementation mechanism. Under the joint implementation mechanism, first world countries or operators in that country who may not want to incur the domestic costs of emissions control can establish projects in foreign nations in order to be awarded emission credit.

Under the clean development mechanism a developed country or an interested operator can fund an emission control venture and hence gets the credits. These two mechanisms are project based in contrast to the third one; the emission trading mechanism whereby interested countries and private operators can trade credits over the international carbon credit exchanges hence enabling those with emission allowance deficit can acquire credits from those with extra.

Legal aspects

However, the emissions trade does not have many rules controlling it and neither are those that are in existence clearly defined. This has led to many frauds, corruption and many others irregularities in the trade causing controversies on its efficiency in carrying out its objectives.

There have been calls to create laws to govern the trade but so far very little has been achieved. ³“Concerns include the cost of MRV and enforcement and the risk that facilities may be tempted to mislead rather than make real reductions or make up their shortfall by purchasing allowances or offsets from another entity and the net effect of a corrupt reporting system or poorly managed or financed regulator may be a discount on emission costs, and a (hidden) increase in actual emissions’’.

Kyoto protocol is the best suited for creation of the regulations hence they will apply in all countries under it. However, some organizations have tried to create rules for themselves, for instance: ⁴“the European Commission’s (EC’s) rule in enforcing scarcity of permits within the EU ETS, this was done by the EC’s reviewing the total number of permits that member states proposed that their industries be allocated.”

Some of the punishments that could be introduced are; fines, sanctioning those that have exceeded their allowances and even imprisonment for fraud.

There has been a proposal for a hybrid instrument for setting prices and issuing of permits this is because organizations controlling the trade can issue too many emission credits, which lead to a drop in prices reducing the ⁵“incentive that permit-liable firms have to cut back their emissions”.

However few permits can cause an extremely soaring permit price which is also not favorable. The hybrid system has a price-floor which is a minimum permit price, and a price-ceiling hence creating a limit on the permit price. ⁶“A price-ceiling (safety value) however, does remove the uncertainty of a particular quantity limit of emission.

However, the most effective rule is Annex I, which requires Annex 1 countries to present an annual reports of inventory of all greenhouse gases releases from emitters and removals from sinks under the UNFCCC and the Kyoto Protocol.”

The country has to choose a leader to deal with the registry, then they have to form a national authority to handle Kyoto activities, and especially the clean development projects. The law determines which annex I country is not in conformity with their emissions limit and for countries that do not conform they are required to make up the disparity and then pay a supplementary of 30% after which they are suspended from the trade.

Emission markets

One Certified emission reduction credit is equal to one metric ton of carbon emissions in the market. The credits are sold by private operators or in the international market at the current price at any specific time. This means that allowances can be traded among countries and each operation has to be permitted by United Nations Framework Convention on Climate Change and also by the countries national system that controls the trade.

The prices are quoted in Euros per ton of carbon dioxide so as this to minimize the quota’s financial effect on the business. There is an international exchange trade for carbon credits currently composed of five members: Chicago Climate Exchange, European Climate Exchange, Nord Pool, Power Next and the European Energy Exchange. ⁷“Companies carry out emission abatement, offsetting and appropriation programs to generate credits that can be traded on one of the exchanges.

Offset is a complimentary mechanism to cap-and-trade. It is intended to cut down GHG releases from pollutants that are not covered under the scope of a cap-and-trade program.”

⁸“In general, these areas embody industries or sectors where GHG emissions are more complex to trail, mitigate, and report and hence offset credits are tradable and bankable within the unit tracking scheme”. The market according to financial analysts is the fastest emerging sector in financial services; it is estimated to be worth about 30 billion Euros and is expected to grow even further and become the world’s biggest market overall.

This is because emission levels are expected to rise as time passes by due to more industries and larger markets, hence the need for credits will increase and so will the market price. ⁹According to the World Bank’s Carbon Finance Unit, “374 million metric tons of carbon dioxide equivalent (tCO2e) were exchanged through projects in 2005, a 240% increase relative to 2004 (110 mtCO2e)[75] which was itself a 41% increase relative to 2003 (78 mtCO2e).”

Tax

Taxation of carbon credits revenues has been a topic that has been faced with many controversies. Because to begin with, there is no accounting procedures for the profits or have they been financially classified as assets liabilities revenues of losses. An analysis of data forwarded by various listed companies exposed that many of them were not accounting earnings from the trade of carbon credits in their returns in computation of income-tax liability.

The tax authorities lately have been keen to ensure that companies have paid their taxes appropriately, but the ambiguity that characterizes financial accounting of carbon credits has remained to be an issue. The businesses have also sought precision in the matter because it has regularly created wrangles for them with the tax system.

There is no precise law on the accounting for carbon credits and there is also much confusion among the scholars because they can be treated as, capital assets or goods, and hence exempting them from capital gains tax.

If it is taken as inventory the revenue accruing from any transaction is taken as taxable revenue, hence drawing a 30 percent corporation tax. The tax handling of revenues from the trade of Credit emissions reductions (CERs) will be greatly be determined by whether CERs are commodities, intangible assets, or services and issue that is presently in which is a grey area.

Finally there also other arguments such as,¹⁰ “whether CERs would attract VAT (levied on sale of goods) or service tax (levied on rendition of services); whether the sale of CERs to overseas buyers would qualify as export of goods or services.

If CERs are to be, if made liable to indirect taxes, may adversely impact the carbon credit-trading boom in Lack of clarity on the treatment of CERs for indirect tax purposes exposes companies engaged in projects generating carbon credits to the threat of significant tax demands Various sectors had specifically sought clarification on the treatment of CERs in the Budget wish list.”

The Institute of Chartered Accountants of India (ICAI) is presently trying to develop accounting procedures for carbon credits and the institution says that, corporations that make proceeds by trading carbon credits will have to prepare their financial statements under the new rules once they are officiated for accounting purposes

Price

Setting a market price for carbon credits has been a challenge. It has been argued that the price of credits should be very high in order to achieve the intended objective of the market which is to reduce greenhouses gases.

Whereas, in setting a carbon price the effects must be considered first being; an increase in the price will increase the costs of products to the consumer, and hence usage of such products will drop and so is there production. This of course will depend on the amount of carbon that a specific product contains and hence the amount of emissions.

¹¹“There has been a long standing debate on the relative merits of price versus quantity instruments to achieve emission reductions. An emission cap and permit trading system is a quantity instrument because it fixes the overall emission level (quantity) and allows the price to vary.

Uncertainty in future supply and demand conditions (market volatility) coupled with a fixed number of pollution credits creates an uncertainty in the future price of pollution credits, and the industry must accordingly bear the cost of adapting to these volatile market conditions”.

Credit versus tax

A credit trading system was introduced by the UN as an alternative to carbon taxing an issue that has been a source of controversy because considering both environmental and economic factors there has to be a strategy to control carbon emissions from industries that will have both matters handled effectively.

Both the tax and the credit systems have their own advantages and disadvantages and as explained above the credit system involves selling allowances to companies depending on the amount of carbon that they emit.

Proponents of the system claim that making emissions a commodity of monetary value will make manufacturers to take it seriously hence manage their activities and also Investors in the credit system get to have control over their costs They also argue that under the Kyoto protocol rules all the investments is used to reduce carbon emissions through an international valid system, and if well used a targeted reduction can be achieved, because of the fixed cap on emissions while under the tax system this might be difficult.

It is also a shock absorber for the economy in case of change of economic conditions carbon allowance prices can be adjusted. The Environmental Defense Fund (EDF) argues that this is the best method through which companies can achieve tangible financial benefits for taking care of the environment and also will encourage sustainable technological development and innovation.

Carbon tax is tax that is levied on the carbon content of fossil fuels because such fuels contain carbon atoms which burn to emit carbon dioxide. It is an indirect tax which creates a monetary payment for carbon emissions. It is implemented by taxing products such as petroleum, gasoline, natural gas, aviation fuel among others.

However, the proponents of this tax claim that it is less complicated, takes less time to implement as there is no much time left to change the atmosphere, and it is cheap compared to the credits. Furthermore, they claim that the worth of emissions is regularized by the government and not changes in the market hence enabling predictability of energy prices, and that when credits go beyond the third generation new companies are disadvantaged to the established companies.

Another argument for the system; is that it has lesser opportunity for manipulation by people with self interests unlike the credits system which is open and has perverse incentives that can change public confidence, thus undermining its effectiveness. The revenues from taxation are more likely to benefit the public than those of the credits system which are mostly beneficial to lawyers and financial consultants.¹²

“Carbon tax revenues can be used to fund progressive tax-shifting to reduce regressive payroll or sales taxes, unlike the credits which may cost the consumer more as more expensive technologies replace older and less expensive coal-fired combustion, and this costs are charged to the consumer with less possibility of rebating or tax-shifting.”

Moreover, credits system depends on market participants to determine a fair price for carbon allowances every day hence, it could easily change to a self-benefiting business for lawyers, economists, lobbyists and other people involved in the market.

Creating carbon credits

Creation of new credits originates from the concept of supplementary within the Kyoto Protocol; ¹³“Supplementarity means that internal abatement of emissions should take precedence before a country purchases carbon credits. It states that a country should create real, measurable and real permanent emissions reductions which undergo procedures to analyze whether credits are legitimate.”

Creation of credits involves the concept of additionality which is portrayed in the Kyoto’s clean development mechanism as a carbon emissions’ control program would have not occurred had it not been for the environmental control concerns hence proving additionality. ¹⁴Proving additionalty involves a process by which project sponsors submit, through a Designated Operational Entity (DOE), their concepts for emissions reduction creation.

The CDM Executive Board, with the CDM Methodology Panel and their expert advisors, review each project and decide how and if they do indeed result in reductions that are additional”. Another concept involving real credits is the personal carbon trading which has not yet been approved but it can help reduce carbon emissions.

It can achieve this by allotting a certain amount of emissions to individuals to an equal per capita basis depending on the national carbon budgets. The credits can be used in purchasing fuel or electricity and anyone who would want to add credits can just buy them. One will use electronic accounts to control them and those who sell their credits will be lowering their carbon footprint which is the objective of the trading.

Criticisms

“Environmental organizations, economists, labor organizations and those concerned with energy supply and excessive taxation have raised a lot of criticism on the issue of carbon credits.” ¹⁵They argue that “trading pollution allowances should be avoided because they result in failures in accounting and that it should be clarified on uncertain science and the destructive impacts of projects upon the people and the environments.

However, some environmentalists instead have advocated for conservative parameters, green taxes, and energy strategies that are founded on justice and communally accepted.” Research has shown that previous schemes of carbon trading have ended up badly and very ineffective, and the performance of most of the organizations involved in the business, including the EU, have been rated very lowly.

In addition, the offsetting trading system has been largely criticized for being complex, especially voluntary offsetting and for some personal carbon offsetting schemes which often have no guidelines, leading to massive fraud activities.

Notably, grandfathering of allowances has also been a major source of controversy; this is where new rules for the market are formulated, which are directed on new firms while allowing the old ‘more favorable’ policies continue for the old companies.

Most of the operators have been accused of giving away allowances to old companies through these policies hence making it difficult for new participants to survive in the trade. Some of the companies buying the allowances have also been accused of transferring the costs to the consumer.

The clean development mechanism policies have been criticized for allowing projects that have no additional value to the environment and also not society friendly. The CDM procedures and standards that are used in assessing additionality have been questioned because there are many projects that have been approved but their activities have not achieved any benefits concerning the environment.

The mechanism has also been accused of being slow in assessing the projects causing unnecessary delays and due to this reasons some countries have opted to add ¹⁶“restrictions on their local implementations and will not allow credits for some types of carbon shed the Clean Development Mechanism (CDM), which validates and measures projects to ensure they produce authentic benefits and are genuinely “additional” activities that would not otherwise have been undertaken. Organizations that are unable to meet their emissions quota can offset their emissions by buying CDM-approved Certified Emissions Reductions.”

The mechanism has also been accused of assuming projects that cover the main contributors to green house gases and considering minor ones. An example is the forestry or land use projects, the protocol has omitted projects on forests conservation, for many inexplicable reasons some political, ethical and others are due to impunity among the organizations that are involved in the credits business.

Taking into account that 20% of carbon emissions are from deforestation activities, then it seems quit an unforeseeable move not to include afforestation projects in the mechanism. Knowing that forests are very vital carbon sinks because we use carbon dioxide for the generation of food and hence so much carbon is stored in them and also in the soil itself. Deforestation leads to the loss of trees hence less absorption of carbon, and when they are burned they emit carbon not forgetting that the roots also release carbon when uprooted.

Although, there have been many suggestions that the projects be included in the CDM, with member countries of the Coalition for Rainforest Nations organization, NGOs and international leaders being in the front line advocating for this, however no agreement yet has been achieved on the matter.

Arguably, forestry offset projects are disapproved for the following reasons; ¹⁷“Additionality, resource access and livelihoods. As said earlier, “additionality” (the project goes above and beyond the status quo to reduce GHG emissions) is vital for a project that aims to generate carbon credits in a baseline-and-credit carbon market.”

Because preventing the people from using the forests resources on the basis of preventing global warming would be infringing into people’s lives and affecting their survival. It is a threat to the wildlife which is also a very important segment of our environment and also issues like wild fires pests’ droughts and land tenure should be considered.

¹⁸“The major problem has been the massive supervision efforts needed in order to make sure projects are indeed leading to increased carbon storage. Greenhouse gas emitters, such as coal-fired power plants, are known as “sources”, and places where carbon and other greenhouse gases, such as methane, can be sequestered, i.e. kept out of the atmosphere, are known as “sinks”.”

Another major criticism is the volatility of the prices and the market at large. This is a major cause of panic to investors since business is not predictable over a long period of time which is also common in all energy related markets. The companies however have learnt how to cope with the prices although there have been accusations of the industries passing on the burden to the consumers which is not right. Kyoto is considering increasing allowances so as to curb these problems.

Future

Analysts in the industry have predicted that the trade will continue to develop and more companies are expected to get involved; ¹⁹ “For Example, in the United States where Fortune 500 powerhouses such as DuPont, Ford, and IBM are voluntarily capping and trading their emissions.

Even though a national cap on carbon emissions doesn’t yet exist in the United States, most consider it inevitable, and legislators are already pushing the issue through the Congress.” However, there are companies that are not only yielding from government pressure to comply but also the consumers and interestingly employees also are a major group to consider since most of them want work in companies that have programs against destruction of the environment.

As the need for development in the world looms, so are production levels and hence emissions will simultaneously continue to increase. This will lead to the demand of more credits and higher prices that will encourage people to engage in environment protection projects in order to make credits to sell to industries.

Helm says that²⁰ “companies can use below their quota can sell their excess as ‘carbon credits.’ The possibilities are endless hence making it an open market.” In relevance to this, statistics have also shown that emission will be the currents world’s gold, a market that could grow to worth trillions of dollars. For instance, City of London’s financial district has a market now worth about $30 billion, but which could grow to $1 trillion within a decade.

²¹“India is an emerging carbon credit market and is actively participating in carbon trading. India had already generated 30 million carbon credits and 140 million were in pipeline in 2007. This number is expected to rise rapidly considering that the country is the first in formulating accounting standards for the credits business a matter that has been a major problem internationally since the Kyoto protocol did not define the rules.”²²

India also has created an opportunity for companies to invest in carbon credits from forests projects making it ahead of all other market among other initiatives that are available in their market only.

Some of these are; the reduction of custom duty on hybrid cars from 25 percent to 14.5 percent in 2007 encouraging companies to use alternative sources of energy a move that has been followed by Indian private companies like, Godrej and Reliance. “Indian villages like Powerguda in Andhra Pradesh region, successful generation of carbon credits worth 147 million tons of carbon dioxide was possible, they use bio-diesel along with other implementing various CDM projects.”

It is therefore evident that the world will be dealing with carbon emissions for a long time and hence we need to strategize on how to handle this global problem. The EU Scheme is expected to include other industries because by analyzing India’s market they are really behind in the creation of new incentives for the market.

Some of the sectors to be considered are: ²³“chemical industries like manufactures of fertilizers and ammonia, petrochemicals and other chemicals, secondary manufacturing industries of food and drink, non-ferrous metals primary and aluminum, non-metallic minerals, gypsum and rock wool, fuel production onshore and offshore oil and gas flaring) ,and waste incineration.”

Regardless of all these plans, the industry will be very difficult to homogenize because of its treatment as a product in the market. ²⁴“It is expected that it will be the electricity companies, on the one (selling) side, and the cement companies, on the other (purchasing) side, to first explore the market.

Some of the companies or projects that could benefit from carbon credits are: Renewable energy, biomass, hydropower; geothermal, wind and solar energy, co-generation, fuel switch, waste processing, landfill gas extraction, biogas applications and afforestation projects.” It is an obvious thing that developed countries are the ones with the bigger responsibility to stop global warming since they are the major emitters of these gases, and thus have the responsibility of taking care of the developing countries mess which is also increasing every day.

The Annex 1 countries therefore, need to come up with strategies to deal with this problem and this will involve evaluation of the Kyoto protocol to measure it success and failures.

Advantages

Emissions trading is advantageous in some ways and especially to the industries. Many of them have reported lower operational costs after adapting emission reduction programs because this method of carbon management is affordable to all despite the company’s stability of level of operations of which some are high while others are still growing. ²⁵

“BP the British energy company decided to reduce emission and reduce their energy consumption by 10%, they made changes like; tightening valves, changing light bulbs, and improving operations efficiency, they also implemented an internal cap-and-trade scheme and met its emissions goal by the end of 2001.

Using the combined C02 reduction strategy, BP reported saving about $650 million.”Investing into the credit trade now would also be a very wise move for businesses; since the allowances are very cheap now but they will very soon go up and hence the credits bought earlier are bound to gain dividends which will be revenues for those who invested.

Participating in the emission trade is also beneficial to the company sales, reputation and continued existence into the future, since consumers tend to favor companies that are aware of the environmental problems facing the world and prefer even more those that do something about it.

To attract customers firms must consider concentrating on the environment and hence get themselves in programs that are geared towards taking care of the environment and especially global warming. In general emission trading has been a major move to help in the fight against greenhouse gases and if well managed and controlled companies can be able to continue with their operations while at the same time they can control the their emissions.

Disadvantages

As mentioned earlier, the emissions trading market is characterized of high instability and huge risks. The market is difficult to predict and it can lead to huge revenues and also huge losses. ²⁶“For example, the EU’s trading scheme (EU-ETS), issued so many permits between 2005 and 2007 that it flooded the market.

Supply soared and carbon prices bottomed out, removing incentives for companies to trade the laws governing the market also are not well defined and they keep changing now and then.” The offsetting system that characterizes the market is another disadvantage because there are no restrictions hence creating many avenues for fraud and other financial crimes. ²⁷

“Some offset firms in the United States and abroad have been caught selling offsets for normal operations that do not actually take any additional C02 out of the atmosphere, such as pumping C02 into oil wells to force out the remaining crude.” The same problem has also made marketing in the trade difficult and many businesses have even decided to be “carbon neutral.” The Federal Trade Commission and the World Economic Forum have decided to create regulations and limits to control the trade so as to prevent the controversies.

However, various businesses are also reluctant to take on this system, so that they would avoid engaging in activities that will lead to more costs and hence increase in the price of their products.

Developing industries are also disadvantaged since they cannot afford the technology needed to be able to reduce their emissions and still maintain production levels making them to be perpetually the purchasers of the credits and never get to sell.

Finally, the confirmation of projects that qualify for additionality as mentioned earlier, the process is long and time consuming, it also allows in some projects that have no positive on the environment hence making the objective of the trade irrelevant and leading to the creation of yet another business.

Measures for success

The emission trade has been relatively successful but also it has experienced many setbacks due to the lack of regulations and an international authority to control it. Some countries like the US, have faced it with disagreement originally but reports show that American firms are some of the leading organizations in support of the clean development mechanism. ²⁸

“The many projects initiated by the domestic companies after January 2000 in diverse areas such as energy efficiency, co-generation, natural gas alternative fuels and hydel power are reasons that has led to the country’s dominance as a larger seller in the carbon market.” Notably, the carbon emission reductions trade has massively expanded although developing countries seem to lag behind because some of them are not even aware of the concept.

The major participants in the market, especially in buying the credits are the world’s powerhouses such as; the US, Germany, Japan and China. London is running a multibillion trade involving the emissions and so is India, which the World Bank has predicted to be the next leading market in the future due to the much effort that they have put to developing emission trading.

The market however needs to be put under some rules to regulate it if it is expected to survive another decade and also achieve its objective. The Kyoto Protocol is advocating for the establishment of coordination rules in emissions trading and execution of interregional revenue transfers. These are very crucial matters in order to make the protocol proficient hence meeting its objective in reducing global warming.

Policies Developed in support of Carbon Credits

²⁹“The World Bank has recognized the significance of the trade, and it recently formed an agreement with Infrastructure Development Finance Company (IDFC) to manage all the projects that have been approved by the clean development board putting in a $10-million aid in to the activity which is expected to generate of $100 million.”

Additionally, the UN has taken a broad step by creating the UN Framework Convention on Climate Change in 1992, which observes the activities of the Kyoto protocol. ³⁰

The UN’s resident coordinator in Saudi Arabia, Riyad Musa Al-Ahmad, has quoted that “the United Nations Development Program (UNDP) is ready to support the launch of Clean Development Mechanism (CDM) activities in the Kingdom. UNDP is currently working in 37 countries around the world on CDM programs, with the main focus on supporting investments in the energy and waste sectors.”

The EU has also joined in and has made the environment its top priority in creation of policies. It has involved the European Investment Bank (EIB) as the money lender of the union for the project. ³¹

It has come up with the “European Union Emission Trading Scheme (EU ETS), which is a mandatory cap-and-trade program for the EU and through the bank it plans to sponsor measures that support ;mitigation; adaptation; research, development and innovation (RDI); technology transfer and cooperation and support for the carbon credits markets.’’ The EU ensures that all the projects that they finance are properly assed to make sure they are capable of creating credits.³²

“Furthermore, the UK House of Commons committee proposed the creation of carbon emissions tradable allowances for individuals.” This is meant to prevent people from engaging in activities that lead to emission of carbon into the atmosphere; with those that are able to control their activities can sell their credits to the excessive emitters of carbon.

They consider the move to be fair that the green taxes which are set and charged to people giving them no choice but to pay for others people’s mistakes. The US also has established the Chicago Climate Exchange, a system through which companies can make professional and lawfully emission targets. In conclusion, the carbon market so far has been successful economically but a lot has to be done for it to meet its environmental objective.

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Footnotes

¹ Arthur Sullivan and Sheffrin Steven, Economics: Principles in action, (Upper Saddle River, NJ: Pearson Prentice Hall) 2003), 124-159.

²Chil Chichilnisky and Heal Gregory, “Environmental Markets: Equity and Efficiency,” (New York: Columbia University Press, 2000), 48-98.

³ Tamra Gilbertson and Reyes Oscar, “Carbon Trading: how it works and why it fails,” Dag Hammerskjold Foundation, 2009.

⁴ Ott. Hermann “Emissions Trading in the Kyoto Protocol, Finished and Unfinished Business”. Linkages Journal 4(3), (1998): 16-20.

⁵ Helm David, “Economic Instruments and Environmental Policy,” The Economic and Social Review 36(3), (2005): 1-24.

⁶ Trevor Houser et al., “Leveling The Carbon Playing Field: International Competition and U.S. Climate Policy Design,” Peterson Institute for International Economics, 2008.

⁷ “Kyoto Protocol Reference Manual On Accounting of Emissions and Assigned Amount,” UNFCCC, 20th March 2006.

⁸ Prasad Michael, “On Carbon, Tax and Don’t Spend (op-ed piece),” New York Times website, 2008.

⁹John Norregaard and Reppelin-Hill Valerie, “Taxes and Tradable Permits as Instruments for Controlling Pollution: Theory and Practice. Working Paper No. 00/13,” International Monetary Fund, Fiscal Affairs Department, 2000.

¹⁰ Arthur Sullivan and Sheffrin Steven. Economics: Principles in action. (Upper Saddle River, NJ: Pearson Prentice Hall, 2003), 87-132.

¹¹ Montgomery Williams, “Markets in Licenses and Efficient Pollution Control Programs”. Journal of Economic Theory no 5, (1972): 395-418.

¹² Prasad, M. “On Carbon, Tax and Don’t Spend (op-ed piece.)”. New York Times website. 2008.

¹³ “Kyoto Protocol Reference Manual On Accounting of Emissions and Assigned Amount,” UNFCCC, 2006.

¹⁴Ott Hermann, “Emissions Trading in the Kyoto Protocol, Finished and Unfinished Business,” Linkages Journal 4(3), (1998): 16-20.

¹⁵ Paul Hoeller and Michael Wallin, “OECD Economic Studies No. 17, Autumn 1991. Energy Prices, Taxes and Carbon Dioxide Emissions,” OECD website, 1991.

¹⁶Trevor Houser et al., “Leveling The Carbon Playing Field: International Competition and U.S. Climate Policy Design,” Peterson Institute for International Economics, 2008.

¹⁷ Williams Montgomery, “Markets in Licenses and Efficient Pollution Control Programs”. Journal of Economic Theory no 5, (1972): 395-418

¹⁸ Scott Reid. “The good, the (mostly) bad, and the faint signs of hope.” The Globe and Mail, no 4 (2009): 25-35.

¹⁹Arthur Sullivan and Steven Sheffrin. Economics: Principles in action. Upper Saddle River, NJ: Pearson Prentice Hall, 2003.

²⁰ David Helm. “Economic Instruments and Environmental Policy”. The Economic and Social Review 36(3), (2005): 1-24.

²¹ William Nordhaus, “A Question of Balance – Weighing the Options on Global Warming Policies,” Yale University Press, (2008): 1-248.

²² Paul Hoeller and Michael Wallin, “OECD Economic Studies No. 17, Autumn 1991. Energy Prices, Taxes and Carbon Dioxide Emissions,” OECD website.

²³ Hermann, Ott. “Emissions Trading in the Kyoto Protocol, Finished and Unfinished Business“. Linkages Journal 4(3), (1998): 16-20.

²⁴ Scott. Reid, “The good, the (mostly) bad, and the faint signs of hope.” The Globe and Mail, no 4 (2009): 25-35.

²⁵ Williams Montgomery, “Markets in Licenses and Efficient Pollution Control Programs,” Journal of Economic Theory no 5, (1972): 395-418

²⁶Ott Hermann, “Emissions Trading in the Kyoto Protocol, Finished and Unfinished Business”. Linkages Journal 4(3), (1998): 16-20.

²⁷ Prasad Macel, “On Carbon, Tax and Don’t Spend (op-ed piece),” New York Times website, 2008.

²⁸ Houser, Trevor et al. “Leveling The Carbon Playing Field: International Competition and U.S. Climate Policy Design.” Peterson Institute for International Economics. 2008.

³⁰John Norregaard and Valerie Reppelin-Hill, “Taxes and Tradable Permits as Instruments for Controlling Pollution: Theory and Practice. Working Paper No. 00/13,” International Monetary Fund, Fiscal Affairs Department.

³¹ Houser Trevor et al., “Leveling The Carbon Playing Field: International Competition and U.S. Climate Policy Design,” Peterson Institute for International Economics, 2008.

³² William Nordhaus, “A Question of Balance – Weighing the Options on Global Warming Policies,” Yale University Press, (2008): 1-248.

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