Marketable Permit (Carbon Credit) - by Tze Liang

Carbon Credit

Idea mooted as part of Kyoto Protocol

Aim: Meet the goal of reducing the world's greenhouse gas emissions by an average 5.2% relative to 1990 levels by 2012

1 Carbon Credit entitles to 1 Tonne of CO2 (Net Emission)

Costs for each carbon credit are around $10 to $40 (so low!)

In 2007, trade market for carbon credits is around $63 billion worldwide in 2007, nearly double that of 2006.

 Advantages

1. Money from sale of carbon credit can be used to support carbon saving schemes. E.g. New Zealand has sold some carbon credits to fund some wind generation projects (clean energy).
2. This scheme creates an incentive for companies/countries to research for green technology and tree planting projects. At the same time, it discourages companies/countries from polluting the atmosphere.
   
3. Explain using the price mechanism (Demand and Supply).

Over time, more energy is required to support the growing population (e.g. China & India), and hence the demand for carbon credits would increase. The demand curve would shift right, while assuming supply is around the same, equilibrium price would increase.

This would then create a greater disincentive for companies to pollute.

 

Limitations

1.       Some companies are just buying carbon credit as a form of commodity, and selling it off for a quick profit when the price rises. (Abuse of system)

2.       The price of each carbon credit must set to be higher than what it takes to clean up

3.       It may be hard to evaluate the net emission of CO₂ by each company / country

4.       Enforcement may not be effective in certain countries that are corrupted / inefficient.

5.       It is hard to determine the total number of permits to be sold / circulated in the whole market.

All currencies are in USD, not SGD.