1. Introduction

No one owns the atmosphere.

Because of this, there is nothing to stop you from dumping as much carbon dioxide into the atmosphere as you like.  However, carbon dioxide causes global warming (climate change) so the countries which make up the European Union have decided to try and reduce the amount of CO2 being emitted.

To do this they have set a cap (a maximum value) on the amount of CO2 the European Union will emit. They have also then produced bits of paper called EU Allowances (EUAs), each one of which is a permit to emit one ton of CO2 equivalent.

The EU has produced fewer EUAs than are needed to cover all the emission

in the EU (about 20% less). Each of the countries in the EU has been given a set quantity of these EUAs based on its past emissions.

Each of these countries then distributes the EUAs to certain types of heavily

polluting industries based within them (eg power stations, steel works cement plants etc). The amount of EUAs each of these factories or plants receives is dependant on their past emissions.

2. How Trading Works

At the beginning of each year a plant or factory is given its EUAs to cover its emissions for that year.  The amount the plant is given is less than it needs.

At the end of each year the plant or factory must surrender enough

EUAs to cover its carbon emissions over the preceding 12 months. Other wise it will face a fine of between 40 and 100 Euros for each tonne of CO2 it is over its allowance.

It can make up the shortfall in four ways:

1 It can cut production, and thus emissions

2 It can introduce energy efficiency measures

3 It can purchase EUAs from plants or factories across the EU who have

done 1 or 2 above and do not require all their EUAs

4 The fourth way involves some degree of controversy. It involves buying CDM credits from developing nations- Though only a proportion of its shortfall can be made up in this way.

Under the Kyoto Protocol developed nations can assist less developed nations on the path to low carbon development. Thus a chemical plant in Middlesborough can pay for energy efficient improvements to a factory in Soweto and claim the carbon credits. However, some organisations have objected to this on ideological grounds, claiming that this provides a “licence to pollute” that enables rich nations to buy their way out , and is “C02lonisation”


Check our other articles for more info on Carbon trading