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What is Carbon Trading?

Carbon trading is also known as emissions trading. It is one of the recommendations of the Kyoto Protocol 1997, which is a legally binding international plan to cut six key greenhouse gases causing climate change.

Carbon trading employs a particular scheme that so-called ‘cap-and-trade’ system. Under Kyoto commitment, a country may allocate permits to companies to emit a certain quantity of greenhouse gases (the cap). If an enterprise proves to emit less than the cap, its excess permit is allowed to ‘trade’ to more polluting company. On the other hand, if enterprises are incapable to meet their targets, in other words they emit more CO2 than their caps, they can buy carbon credits from companies that are under their targets. They are usually traded in over the counter (OTC) market. In short, Ratnatunga emphasizes that “What is traded in carbon trading is not actual carbon, but the right to emit CO2″

The European Union Emission Trading Scheme (EU UTS) is recognized as the largest multi-national carbon trading worldwide. How about Australia? Australia is proposing a carbon trading scheme in 2010. However since 1998 carbon trading has taken place in the State of New South Wales, Australia. It is most likely carbon trading will be imminent globally.

Ref:
Ratnatunga, J. (2007), “An Inconvenient Truth about Accounting“, Journal of Applied Management Accounting Research, Vol. 5, No. 1, pp. 1-20.