An emissions trade occurs when a company wishing to reduce its net greenhouse gas emissions purchases emissions credits from a counter-party whose actual emissions are less than an agreed baseline target (also known as a ‘cap').
The baseline target may be imposed by a mandatory scheme such as the European Union's Emissions Trading Scheme (EU ETS) outlined below or voluntarily by a company seeking to become carbon neutral (read on with the Chicago/European Climate Exchange, a BP case study on their internal cap-and-trade program, and services provided by SBP on Going Carbon Neutral).
An organisation with greenhouse emissions levels above their baseline has three options to meet their target:
Emissions credits may be created by, for example, improved efficiency in use of energy or industrial processes (to reduce a participating organisation’s greenhouse emissions below their baseline target) or through greenhouse gas sequestration strategies such as forestry, methane destruction or changed agricultural practices (read on at ‘How companies can generate emissions credits’ ).
Clean Development Mechanisms (CDM’s), are arrangements under the Kyoto Protocol allowing participating industrialised countries, with a greenhouse gas reduction commitment (Annex 1 countries), to invest in projects that reduce emissions in developing countries. CDMs therefore offer industrialised countries a potentially lower-cost alternative to reducing their own greenhouse gas emissions. They also offer developing countries (such as Papua New Guinea, Indonesia and China) an opportunity to generate emissions credits and participate in emissions trading.
