Information on Carbon Trading

Scientists have shown in the last two decades that Climate Change (Global Warming) is very real and caused by carbon emissions. There is scientific backing that proves that we, humans, have contributed to this phenomenon. In January 2001, the Intergovernmental Panel on Climate Change (IPCC), stated “An increasing body of observations gives a collective picture of a warming world and other changes in the climate system… There is new and stronger evidence that most of the warming observed over the last 50 years is attributable to human activities,” thus supporting the claim. It has led scientists to believe that there is over 90% certainty that human activities are the cause for global warming by emitting carbon into the atmosphere. Some of the phenomena we have seen are the continual rise of the temperature of the Earth’s atmosphere, the greater frequency of hurricanes and flooding due to the melting of polar ice caps. We may be seeing just the beginning of the catastrophic damage caused by global warming. Scientists around the world have urged politicians, industries alike to take proper action in diverting this worldwide disaster.

Human activities, primarily the burning of fossil fuels (coal, oil, and natural gas), and secondarily the clearing of land, have increased the concentration of carbon dioxide, methane, and other heat-trapping (“greenhouse”) gases (carbon, methane) in the atmosphere which lead to the greenhouse effect. It starts with the 50% of sunlight that is absorbed by the Earth’s surface which radiates energy in the infrared region. Greenhouse gases in the atmosphere absorb most of the infrared radiation emitted by the surface and pass the absorbed heat to other atmospheric gases through molecular collisions. The greenhouse gases then radiate in the infrared range downward towards the earth. With increasing amount of greenhouse gases in the atmosphere, a greater warming effect caused by greenhouse gas effect leads to global warming.

Much of the carbon dioxide released is due to the burning of fossil fuels. Fossil fuels contain carbon from plants and animals that were fossilized over millions of years ago. When the fossil fuels are burned, they interact with the oxygen in the air to release carbon dioxide gas. When the carbon dioxide is released in the atmosphere it emits radiation in the thermal infrared region leading to overall rise in temperatures.

Carbon dioxide’s molecular structure allows for absorption and emission of heat. It consists of one carbon atom with an oxygen atom bonded to each side. When its atoms are bonded tightly together, the carbon dioxide molecule can absorb infrared radiation released by the Earth’s surface. The molecule starts to vibrate and eventually, the vibrating molecule will emit the radiation again, and it will likely be absorbed by yet another greenhouse gas molecule. This absorption-emission-absorption cycle serves to keep the heat near the surface, effectively insulating the surface from the cold of space.

Water vapor, methane, nitrous oxide, and a few other gases are also greenhouse gases and contribute to the warming of the earth’s atmosphere. They all are molecules composed of more than two component atoms, bound loosely enough together to be able to vibrate with the absorption of heat. The major components of the atmosphere that do not contribute to the greenhouse effect are gases such as oxygen, nitrogen, i.e two-atom molecules that are too tightly bound together to vibrate and thus they do not absorb any heat.

Some of the statistics taken from scientists who have measured the environmental impact of global warming in the past two centuries share some disturbing facts. Measurements from Antarctic ice cores show that before industrial emissions started atmospheric CO2 levels were about 280 parts per million by volume (ppmv), and stayed between 260 and 280 during the preceding ten thousand years.
Carbon dioxide concentrations in the atmosphere have gone up by approximately 35 percent since the 1900s, rising from 280 parts per million by volume to 387 parts per million in 2009. Carbon dioxide emissions are growing at an alarming rate. Recent data shows that in the 1960s, the average annual increase was only 37% of what it was in 2000 through 2007. The first 50 ppmv increase took place in about 200 years, from the start of the Industrial Revolution to around 1973; however the next 50 ppmv increase took place in about 33 years, from 1973 to 2006. These numbers predict that as the world continues to populate and thrive and there is greater demand for energy, without some form of regulation of carbon emissions.

The European Union (EU) has been the catalyst for many of the cap and trade programs that now operate worldwide. With the help of the United Nations, the EU has pushed their environmental cause upon industrialized nations and developing countries and have helped make aware the detrimental effects of global warming. They have consistently made this a top priority in the last decade. The European Union is far head when it comes developing a program for carbon trading and reducing carbon emissions.

The European Union’s Emission Trading Scheme (EU ETS) was created in 2005 and is the largest multinational greenhouse gas emissions cap and trade program. It was designed to help European nations meet their commitments to the Kyoto Protocol. This program includes 27 countries and all large industrial facilities, including those that generate electricity, refine petroleum, and produce iron, steel, cement, glass, and paper. The ETS currently covers more than 10,000 installations with a net heat excess of 20 MW in the energy and industrial sectors which are collectively responsible for close to half of the EU’s emissions of CO2 and 40% of its total greenhouse gas emissions.

The first phase of the EU ETS from 2005 to 2007 was deemed a failure and programs since then have learned from its costly mistakes. It never priced carbon fairly. Phase 2—which runs from 2008 to 2012—will redeem Phase I and hopefully help Europe fulfill its commitments. The rules for Phase 3—which extends from 2012 to 2020—were published in December 2008 targets a 20 percent reduction in emissions from 1990 levels by 2020.

Under the EU ETS, large emitters of carbon dioxide within the EU monitor and annually report their CO2 emissions, and they are obliged every year to return an amount of emission allowances to the government that is equivalent to their CO2 emissions in that year. In order to neutralize annual irregularities in CO2-emission levels that may occur due to extreme weather events (such as harsh winters or very hot summers), emission allowances for any plant operator subject to the EU ETS are given out for a sequence of several years at once. Some emitters get the allowances for free from the EU member states’ governments, but some changes have been since then. Besides receiving this initial allocation on a plant-by-plant basis, an operator may purchase EU allowances (carbon credits) from others (emitters, traders, the government.) If an emitter has received more free allowances than it needs, it may sell their carbon credits to someone else.

In January 2008, the European Commission proposed auctioning a greater share (60+ %) of permits rather than allocating freely, and inclusion of other greenhouse gases, such as nitrous oxide and perfluorocarbons. The EU ETS has recently been extended to the airline industry as well, but these changes will not take place until 2012.

EU ETS program adopted Kyoto flexible mechanism certificates as compliance tools. The first is the Joint Implementation projects defined by Article 6 of the Kyoto Protocol, which produces Emissions Reduction Units (ERUs). The second is the Clean Development Mechanism (CDM) defined by Article 12, which produces Certified Emission Reductions (CERs). Lastly, the International Emissions Trading (IET) defined by Article 17 is another method of compliance. Each method is equivalent to the reduction of one ton of carbon dioxide. These Certified Emission Reductions (CERs) can be obtained by implementing emission reduction projects in developing nations that have ratified the Kyoto Protocol.

Under the EU ETS, the governments of the EU Member States agree on national emission caps which have to be approved by the EU commission. They are required to allocate allowances to their industrial operators, track and validate the actual emissions in accordance against the relevant assigned amount, and require the allowances to be retired after the end of each year. The operators within the ETS may reassign or trade their allowances by privately by moving allowances between operators within their company, or over the counter using a broker to privately match buyers and sellers or trading in one of Europe’s Climate Exchange for derivatives. When each change of ownership of an allowance is proposed, the national registry and the European Commission are informed in order for them to validate the transaction.

In order to make sure that real carbon trading emerges (and that CO2 emissions are reduced), EU governments must make sure that the total amount of allowances issued to installations is less than the amount that would have been emitted under normal circumstances. For each Phase, the total quantity to be allocated by each Member State is defined in the Member State National Allocation Plan (NAP) (equivalent to its UNFCCC-defined carbon account.) This method has been hugely criticized due to ‘grandfathering’ where the government gifts more allowances to heavy polluters for free. An amendment has been approved abolishing the NAP by 2013. The end result is for each Member State to meet the Kyoto target.

Europe’s cap and trade system will reduce carbon emissions and climate change when it’s implemented, though politics is holding it up.

In the U.S., the EPA (Enivironmental Protection Agency) has enacted several programs in the effort to lower global warming emissions. According to data, the U.S. contributed approximately a third of the world’s emissions. This significant figure has mounted pressure on the U.S. to change their polluting ways. In 1992, the international environmental treaty, United Nations Framework Convention on Climate Change (UNFCC) was developed. The treaty is considered legally non-binding, since it does not enforce mandatory limits on greenhouse gases on countries but its intention is to stabilize greenhouse gas emissions. The treaty consists of several protocols, the main one being the Kyoto Protocol, which set stringent reductions in pollutants. The Kyoto Protocol which was signed by almost all nations except for the U.S., enforced legally binding reductions in greenhouse gas emissions of an average of 6 to 8% below 1990 levels between the years 2008-2012. The United States would have been required as member of the UNFCC to reduce its total emissions by an average of 7% below 1990 levels. However neither the Clinton administration nor the Bush administration sent the protocol to Congress for ratification. The Bush administration explicitly rejected the protocol in 2001. Despite the fact the U.S. did not ratify the contract, the U.S. has put into place several cap and trade programs within state(s) and at the national level and and the administration has expressed desire to trade internationally at some point. Some cap and trade systems function effectively and independently in U.S. as there are different needs within each state, and limits that need to be set without compromising a healthy economy.

As of 2009, the newly elected U.S. President, Barack Obama, has stated many times his support in investing in renewable sources of energy, along with reducing the harmful effects of global warming emissions at home. However, during the climate summit held in December 2009, the President has revealed that the current U.S. budget prevents the U.S. from contributing to developing nations fighting carbon emissions. Legislation to create a cap and trade program to trade carbon is stalled in the Congress.

Currently, there are several programs in the U.S. that Congress has introduced to regulate emissions other than carbon into the atmosphere:

The U.S. Environmental Protection Agency’s (EPA) Acid Rain Program (ARP) was instituted in 1990 under Title IV of the Clean Air Act (CAA) and was established by EPA in 1995. The ARP regulates the sulfur dioxide (SO2) and nitrogen oxides (NOx) emissions which are the primary causes of acid rain. The goal was to reduce S02 emissions by 10 million tonnes from 1980 levels. In 2000, the Act also called for 2 million tonnes of NO2 emissions to be reduced which according to EPA has largely been achieved. The ARP is viewed as one of the more successful federal regulatory programs within the last 10 years with annual benefits exceeding costs by a factor of 40 to 1. EPA has used the ARP fundamental elements as a model for other cap-and-trade programs, including the NOx Budget Trading Programs (NBTP), which went into effect in 2003, and the published Clean Air Interstate Rule (CAIR) and Clean Air Mercury Rule (CAMR) in 2005. CAIR will permanently cap emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx) in the eastern United States, specifically 28 eastern states and the District of Columbia. CAIR will reduce SO2 emissions in these states by over 70 percent and NOx emissions by over 60 percent from 2003 levels. This will result in $85 to $100 billion in health benefits and nearly $2 billion in visibility benefits per year by 2015 and will substantially reduce premature mortality in the eastern United States.

SO2 and NOx emissions come from electric generating units that burn fossil fuels, such as coal, oil, and natural gas, and that serve a generator >25 MW. For these units, Part 75 of Volume 40 of the Code of Federal Regulations (CFR) requires continuous monitoring and reporting of SO2 mass emissions, carbon dioxide (CO2) mass emissions (Section 821 of the Clean Air Act requires CO2 emissions to be monitored and reported to EPA), NOx emission rate, and heat input. The SO2 component of the ARP is a cap and trade program, designed to reduce acid deposition by limiting SO2 emission levels in the “lower 48” states of the United States. EPA controls NOx emissions from coal- fired generating units through rate-based standards linked to boiler types and allows for companies to “average” rates for these generating units.

In October 1998, EPA added Subpart H to Part 75, which provides a blueprint for the monitoring and reporting of NOx mass emissions and heat input under a state or federal NOx emissions reduction program. Subpart H has since been adopted as the required monitoring methodology for NOx mass emissions and heat input under the NOx Budget Trading Program (NBTP). The ARP and NBTP are based on a monetary system of tradeable allowances (1 t of SO2 or NOx = 1 allowance) that requires rapid, end-of- year reconciliation of emissions and allowances. Because of this, EPA had to minimize the use of traditional enforcement procedures. (For the NBTP, which is an ozone season [May 1 through September 30] program, reconciliation is done at the end of the ozone season.) For an ARP source that fails to comply with the allowances it holds for a particular calendar year, Section 411 of the Clean Air Act provides for stringent automatic penalties. The excess emissions penalty for SO2 or NOx is $2000/t, adjusted for inflation each year, and payable without demand to the U.S. Treasury. This statutory penalty is significantly higher than the value of an allowance.

The Regional Greenhouse Gas Initiative (RGGI) is one of the U.S. cap-and-trade program that covers a single sector—electricity generation—in 10 northeastern and mid-Atlantic states. The program aims to achieve a 10 percent reduction in carbon emissions from power plants by 2018. The program’s most notable aspect is that states unanimously chose auctioning to distribute the vast majority of carbon emission allowances. Six of the ten states will auction nearly 100 percent of their allowances. The auctions of the other four states include fairly small portions of fixed-price sales or direct allocations. The program’s initial three-year compliance period begins in 2009, but the first multistate auctions occurred on September 25 and December 17, 2008. The first auction, which included allowances from only six states, raised $38.5 million, while the second raised $106.5 million. States and electric utilities will invest the vast majority of those funds from the carbon credits sale in energy efficiency and renewable technologies, with an emphasis on reducing demand for fossil fuel–based electricity and saving consumers money.

However, there is no national carbon trading scheme or cap and trade project in the United States and the political climate of the country means the chance of passage isn’t likely.