How does carbon trading work?

Answer 1

Carbon trading is part of a carbon pricing mechanism to reduce greenhouse gas emissions by industry.

Each year, the government decides on the total amount of greenhouse gases it will allow industries to emit from all activities. Each business that is a major source of greenhouse gas emissions is allowed to buy (or is granted free) an annual quota of permits to produce greenhouse gases, so that all such permits equal the national target for the year. If the business modifies its processes such as to reduce its greenhouse emissions, it can sell its unwanted permits to the highest bidder. If another business wants to expand and exceed the limit imposed by its own quota, it can buy permits from another business. Thus, there is an incentive for a business to reduce its emissions so that it can sell its permits at a profit, and so that it does not have to pay an increasingly high price for permits on the secondary market.

By this means, the government can control, then reduce, the total greenhouse gases produced in the state or nation. It can gradually reduce this limit in line with the long-term national target.

Answer 2

Emissions trading can provide economic incentives to businesses willing to reduce carbon emissions through good environmental practices. A business is given a limited allowance of permitted pollutant and must purchase further allowance if required.

Answer 3

Carbon trading is a market-based approach to reducing greenhouse gas emissions. Companies are allotted a certain amount of carbon credits they can use, trade or sell. If a company emits fewer greenhouse gases than its allowance, it can sell its extra credits to another company that has exceeded its limit. This system creates a financial incentive for companies to reduce their emissions.