Carbon emissions trading

Carbon emissions trading is a form of emissions trading that specifically targets carbon dioxide (calculated in tonnes of carbon dioxide equivalent or tCO₂e) and it currently constitutes the bulk of emissions trading.

This form of permit trading is a common method countries utilize in order to meet their obligations specified by the ; namely the reduction of carbon emissions in an attempt to reduce (mitigate) future climate change.

Under Carbon trading, a country having more emissions of carbon is able to purchase the right to emit more and the country having less emission trades the right to emit carbon to other countries. More carbon emitting countries, by this way try to keep the limit of carbon emission specified to them.

Emissions trading works by setting a quantitative limit on the emissions produced by emitters. The economic basis for emissions trading is linked to the concept of property rights (Goldemberg et al.., 1996, p. 29).

The economic problem with climate change is that the emitters of greenhouse gases (GHGs) do not face the full cost implications of their actions (IMF, 2008, p. 6). There are costs that emitters do face, e.g., the costs of the fuel being used, but there are other costs that are not necessarily included in the price of a good or service. These other costs are called external costs (Halsnæs et al.., 2007). They are "external" because they are costs that the emitter does not face. External costs may affect the welfare of others. In the case of climate change, GHG emissions affect the welfare of people living in the future, as well as affecting the natural environment (Toth et al., 2001). These external costs can be estimated and converted in a common (monetary) unit. The argument for doing this is that these external costs can then be added to the private costs that the emitter faces. In doing this, the emitter faces the full (social) costs of their actions (IMF, 2008, p. 9).

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