General Frequently Asked Questions
The basic principle involves setting a limit on the total quantity of GHG emissions allowed to be released over a given period of time (the “cap”). Each participant in the scheme receives an individual cap or allowance. Emission permits or allowances are issued to help cover these caps.
And the ‘Trade’
The trading part establishes a market for these permits by allowing organisations to buy and sell depending on whether they have a shortfall or surplus in allowances. (E.g. a participant who emits less then their allowance can sell the unused balance to another participant who has exceeded their allowance). Emissions trading encourages companies to continually reduce emissions – the more permits they don’t use, the more money they can make from selling that excess.
Most emissions trading schemes also allow participants to purchase carbon credits from GHG emission reduction projects in developing countries. One credit equals one tonne of emissions saved. As long as these credits are certified to the correct level then they can count towards the emitter’s target back home. However, to ensure that emitters are making a significant contribution to controlling their own emissions, and are not just buying their way out of their obligations, offset usage in trading schemes is usually limited to a proportion of the overall emissions target.
An emissions trading scheme, when functioning well, results in overall emissions remaining within the cap, while individual participants have the flexibility of a market-based mechanism within which to operate.
The carbon markets have witnessed significant growth over the last few years, but they are not risk-free. Investing in carbon credits is more complex than a traditional investment, making the opportunity more difficult for individual investors to evaluate. If you need to sell your carbon credits at any given time, you should be aware that your ability to do so will be contingent on the state of the secondary trading market, which is affected by various global political and economic factors.. CMX recommends that purchasers of its credits retire them in order to reduce their carbon footprint. CMX will be a part of any industry initiative on best practice and strongly recommends that consumers seek independent financial advice before investing in the carbon markets.
- Mitigate against the risk of impending regulations
- Create significant savings from reduced energy bills and increased operational efficiencies
- Demand from stakeholders, improving brand perception, especially in the eyes of environmentally conscious consumers
- To meet with Corporate Social Responsibility (CSR) obligations
- Leading by example, power to evoke a real change in consumer purchasing behaviour
- Reputational and commercial risk of not being seen as environmentally conscious
- The rising threat of extreme weather warnings, rising sea levels and natural disasters
- Security risks from lack of energy, water and food supply
What are the major differences between compliance and voluntary markets?
Carbon markets can be either voluntary or mandatory. The main difference between the two is that the voluntary market is unregulated. Even so, there are recognised international standards, such as The Gold Standard, that monitor and verify the quality and validity of the carbon credits that are traded. Those involved in both markets also tend to have different profiles. Compliance schemes are currently aimed at the most “energy intensive” emitters (at a company level). These include power generators, oil refineries, iron and steel production and processing companies, those who produce commodities such as cement, glass and ceramics and the paper and pulp industry. The voluntary market serves the purpose of businesses (typically blue-chip corporations), government departments, NGOs and single individuals wanting to manage their carbon footprint.