Imagine a trading floor where a crowd of brokers bustle about buying and selling. Phone calls, handshakes, shouts. But something is different. The financial agents are not exchanging shares, but… trees.
Much has been said about carbon credits, often in association with other terms such as the Kyoto Protocol, "emission trading" or "cap and trade". Let us try to explain in simple terms what it is about: it is a form of market, an "exchange" created to provide economic incentives to those who wish to reduce their greenhouse gas emissions; an exchange that, however, does not use a currency such as the dollar or the euro as its unit of measure for transactions, but CO2 expressed in tonnes.
"The fundamental concept is actually very simple: greenhouse gas emissions put the balance of the ecosystem at risk – explains Simone Molteni, LifeGate's scientific director – and so a way must be found to reduce them. If you want something not to be wasted, there is no better way than making people pay for it. This simple move establishes a virtuous circle, because those who make no effort to combat a problem affecting the entire community are penalised, while those who manage to reduce their emissions receive recognition." And not only economic recognition.
A national or supranational authority defines a maximum value, a set volume (in English, "cap") of CO2 emissions into the atmosphere at a global level. This value is divided and allocated in the form of "emission rights" among states and companies. The commitment, at this point, is to emit CO2 in quantities equal to or lower than the assigned quotas. Otherwise, the party must purchase the credits it lacks from other parties that have behaved more virtuously than required and can therefore sell their surpluses.
The states and companies that are able to reduce their emissions benefit both economically and in terms of reputation. Economically, because they are able to earn from the sale of credits; in terms of reputation, because they demonstrate to the entire system that they are capable of complying with the rules or even doing better. Let us now look at which markets are in operation and what means are available to states.
The largest and most structured market is the one introduced by the Kyoto Protocol in 1997. Thanks to what are known as "flexibility mechanisms", industrialised countries have a number of instruments at their disposal to meet the reduction targets set by the Protocol. The underlying theory is "pay less, everyone pays" – that is, acting in a coordinated manner to lower the costs of a project aimed at reducing CO2 emissions.
There are three flexibility mechanisms, depending on the economic development of the country wishing to benefit from them: one provides for the possibility of creating shared projects exclusively between industrialised countries; the second between industrialised countries and developing countries; the last gives states the possibility of trading the emission rights acquired through the previous mechanisms.
It is precisely thanks to this last mechanism that several regional emissions markets have developed. The largest and most advanced is the European Union Emission trading scheme (EU ETS), the market established by the European Union to pursue its own fight against climate change. The United States has always been opposed to the introduction of a carbon credit market, for fear of seeing its economic growth hindered and its freedom to consume curtailed.