How can you force firms to cut down their carbon emissions? Put a price on them. That's the idea behind carbon trading, which got a boost last week when California launched the world's second-largest carbon market. Other new and improved trading systems are springing up around the globe and could eventually work together.
We need to cut greenhouse gas emissions as efficiently as possible to prevent dangerous climate change. So, the argument for carbon trading goes, we should be able to trade the right to emit: firms that cut emissions can profit by selling emissions permits to those that do not.
Dream market
Concerned scientists, politicians and activists have long dreamed of a global carbon market, one that would compel companies, wherever they are based, to buy emissions permits, issued annually, or to stop emitting. The Kyoto protocol, which expires this year, came into force in 2005 to realise this dream, but it was only adopted by 37 countries.
"The best scenario would be one global market," says Luca Taschini of the Grantham Research Institute in London. But it's unlikely that countries will all sign up to the same scheme. Instead, success is likely to come from the growth of local markets that could eventually connect to form a more global market.
The first carbon market was the European Union's Emissions Trading System (ETS), set up as a result of the Kyoto protocol. Richard Newell and colleagues at Duke University in Durham, North Carolina, calculate that European emissions fell by 2 to 5 per cent between 2005 and 2007 thanks to the ETS. Since then, however, the system has struggled, partly because firms were handed too many permits for free.
According to Andreas L?schel of the Centre for European Economic Research in Mannheim, Germany, there are a staggering 1.3 billion surplus permits, equivalent to 1.3 billion tonnes of carbon. That's over a quarter of the EU's total annual emissions.
Getting better
Newer schemes have learned lessons from the ETS and "are getting better", says Dallas Burtraw of Resources for the Future, a non-profit body in Washington DC. California's carbon market forces firms to bid at auction for emissions permits, which have a not insignificant minimum price. During the first auction last week, all permits for 2013 sold at just above this floor price, suggesting it ensured that emitting carried a cost.
One remaining problem with local carbon markets is that firms can avoid paying for emissions by outsourcing manufacturing abroad. This may explain why the UK's emissions fell in recent years. "A lot of emissions got exported to countries like China," says Taschini.
But as more carbon markets launch, fewer countries will be willing to import emissions. China, for example, is launching seven prototype markets, and hopes to have a national system by 2016. South Korea will set up a market next year, and Brazil, Mexico and India are considering setting them up too.
The system will work better if markets link up to trade internationally ? greater competition for permits should add to the incentive to cut emissions. The first such link will be between the ETS and Australia's new trading system, after it launches in 2015. "Linking is the holy grail," says Burtraw.
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