Economics Carbon Trading Questions
Carbon trading is a market-based approach to reducing greenhouse gas emissions. It works by setting a limit or cap on the total amount of carbon dioxide and other greenhouse gases that can be emitted by industries or countries. This limit is divided into individual allowances or permits, each representing a specific amount of emissions.
Companies or countries that emit less than their allocated allowances can sell their surplus permits to those who exceed their limits. This creates a financial incentive for companies to reduce their emissions, as they can profit from selling their unused permits.
The trading of these permits takes place in a carbon market, where buyers and sellers can trade permits either directly or through intermediaries. The price of permits is determined by supply and demand dynamics, with prices typically increasing as the cap on emissions is tightened.
By creating a market for carbon emissions, carbon trading encourages cost-effective emission reductions, as companies can choose the most economically efficient methods to reduce their emissions or purchase permits from others. This system also promotes international cooperation, as countries can trade permits across borders, allowing for emissions reductions to occur where they are most cost-effective.