Cap-and-trade and project-based framework: how do carbon markets work for greenhouse emissions reduction?

Godoy, Sara Gurfinkel Marques de; Saes, Maria Sylvia Macchione

doi:10.1590/1809-4422ASOC795V1812015en

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Articles • Ambient. soc. 18 (1) • Jan-Mar 2015 • https://doi.org/10.1590/1809-4422ASOC795V1812015en copy

Cap-and-trade and project-based framework: how do carbon markets work for greenhouse emissions reduction?

Authorship SCIMAGO INSTITUTIONS RANKINGS

There are two examples of carbon market mechanisms: i ) trading based on the cap-and-trade principle establishes Greenhouse Gases (GHG) emission limits for companies that can negotiate allowance to pollute (as in European Union Emission Trading Scheme, EU ETS) , and ii ) carbon credits, project-based emission reductions of GHG (such as the Clean Development Mechanism of the Kyoto Protocol, CDM). Given the importance of these two, this paper presents the dynamics of the evolution of carbon markets evolution by analyzing different markets (including other examples) and their framework, performances, potential and barriers. Besides these two programs, other national and regional systems are being developed, bu EU ETS and Kyoto stand in terms of volume and visibility. Despite existing criticism, in some countries volume of GHG emissions decreased between 1990 and 2011, probably influenced by the modernization of some formerly obsolete and inefficient industrial plant, and also by the poor performance of world economies in recent years.

Clean Development Mechanism; Kyoto Protocol; Carbon Market; EU ETS; Institutional Economics

EU ETS	CDM
European developed countries.	Developing countries.
Shared by sectors: Cement and lime, paper, iron, ceramics, chemicals, hospitals, universities, aviation.	Shared by sectors: Energy, transport, fugitive emissions from fuels, solid fuels, oil and gas, industrial processes, mineral products, chemical industry, production of halocarbons and sulfur hexafluoride, consumer halocarbons and sulfur hexafluoride, agriculture, land use, land use change and forestry, and sewage treatment.
Emission limits passed on to governments; designs change according to countries’ policies.	Emission reduction targets are passed on to governments and project implementation is in accordance with countries’ policies.
Target until 2020.	Target until 2020.
Annual limits.	Goals in the period and passed on to governments.
Three phases (2005 to 2007; 2008 to 2012; 2013 to 2020).	Two phases (2008 to 2012; 2013 to 2020).
Participation in the EU ETS is currently mandatory for certain sectors.	Still voluntary.
Emission limits (permission to emit, emission licenses, allowances).	Emission reduction targets (reduced emission reduction).
GHG converted to CO2e	GHG converted to CO2e
Annual monitoring	Annual monitoring
Based on “learning by doing” principle with updates and modifications needed over time.	Based on “learning by doing” principle with updates and modifications needed over time.
European countries participate in the program.	Interested developing countries can participate.
Stages in the EU ETS process: preparation, approval, emission permit transfer, monitoring, crediting, verifying.	Stages in the CDM: preparation, approval, validation, register, monitoring, certifying, carbon credit issuance.
Taxation: national policy.	Taxation: national policy.
Regulatory committee: Commission of EU ETS.	Regulatory committee: CDM Executive Commission.
Methodologies of calculations of emission reductions are more generalized.	Methodologies of calculations of emission reductions are more detailed.
Legal nature of documents, arising from the DIRECTIVE 2003/87/CE and other amendments, are based on this initial document.	Legal nature of documents, arising from the Kyoto Protocol of 1998 and other amendments, are based on this initial document.

Year	2005	2006	2007	2008	2009	2010	2011	2012
Price	3 a 7	6 a 24	12 a 25	25	17	16	18	4

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[TFN01] Source: UNFCCC, 2012; WORLD BANK, 2013; UNFCCC, 1997. Data developed by authors.