Carbon Credits and Global Emissions Trading

A Viable Concept for the Future?

Term Paper 2008 19 Pages

Environmental Sciences


Table of Contents

1. Introduction

2. Global Climate Change
2.1. Intergovernmental Panel on Climate Change (IPCC)

3. Emissions Trading
3.1. The Concept
3.2. Emissions Trading under the Kyoto Protocol
3.3. The European Union Greenhouse Gas Emissions Trading Scheme
3.4. International Carbon Action Partnership

4. SWOT Analysis

5. Conclusion

6. Bibliography

1. Introduction

The ongoing process of changes in the global climate system is rather undisputed these days, as it is evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice as well as rising global sea levels. Moreover, while the exact causes for the currently observed increases in global temperatures are yet to be established, a growing consensus is emerging that at least part of it is human-caused.[i] As a result, various panels and organisations have emerged throughout the world, which are working on strategies how to reverse or at least halt this process.[ii] As Kolk & Pinske[iii] point out the resulting climate policies across different sectors and locations are diverse. Various companies are trying to restructure their operations in order to reduce waste and to make their processes more energy efficient. A number of governments are enacting policies to replace CO2-intensive energy, released through the burning of coal, oil and gas by more environmentally friendly, so-called ‘clean’ energy, such as wind, solar, or hydroelectric power. Others are resorting back to nuclear power asserting that the actual risks of this technology are by far not as high as they are perceived to be or as they were some years ago. A further alternative that has recently been implemented by the EU is a ‘cap-and-trade system’ for energy-intensive industries, which defines strict limits for the absolute amount of emissions. While the responsibility for complying with this regulation rests with the companies in the respective industries, they are free to find ways how to stay within the limits. Compensating for emissions by purchasing carbon credits is one prominent option available to companies in this respect.[iv]

Purpose of this paper will hence be to analyse the current state of emissions trading development and assess the prospects of a universal worldwide emissions trading scheme.

2. Global Climate Change

While changes in the Earth’s climate have occurred throughout the history of our planet, the United Nations (UN) coined the term global warming, or global climate change, explicitly with reference to the human-caused change in recent decades. It describes the increase in average temperatures of the oceans and near-surface air since the mid-twentieth century and the projected continuation of that phenomenon.[v]

2.1. Intergovernmental Panel on Climate Change (IPCC)

The Intergovernmental Panel on Climate Change (IPCC), established in 1988 by the World Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP), is a scientific body responsible for crafting reports on the costs and benefits of global warming and assessing the potential of different approaches to dealing with the issue. In its 2007 Fourth Assessment Report, the IPCC concludes that a single technology or sector will neither be entirely responsible nor sufficient for the mitigation of future warming. An estimate of the IPCC’s Working Group III states that in order to limit the average global temperature rise to 2°C, developed countries as a group need to reduce their emissions to below 1990 levels in 2020 and to still lower levels by 2050, while developing countries need to make substantial reductions too.[vi] In the following sections this paper will summarise the IPCC’s findings on the causes, its projected effects and suggested responses to the problem of global warming.


Greenhouse Effect

As indicated earlier, the detailed causes of global warming remain contested and a field of ongoing research. The prevailing scientific consensus is however, that an increase in atmospheric greenhouse gases caused by human activity is predominantly responsible for the temperature increase. In line with this, the IPCC contends that most of the observed increases in global average temperatures since the mid-twentieth century are very likely due to an increase in anthropogenic (i.e. human-caused) greenhouse gas concentrations. Of these gases carbon dioxide (CO2) is the most important one whose annual emissions represented 77 percent of total anthropogenic greenhouse gas emissions in 2004, having grown by about 80%, from 21 to 38 giga tonnes (=38x109t) since 1970. According to the IPCC, the major part of this growth in greenhouse gas emissions stems from energy supply, transport and industry.[vii]

The theories about the exact chemical and physical processes involved in the phenomenon of global warming are manifold and some of them of enormous complexity. One relatively easy to understand construct which is commonly used to explain global warming is termed the greenhouse effect. In simple terms, the greenhouse effect can be described like the following:

The Earth receives energy from the sun in form of radiation. Most of this radiation is in visible wavelengths or infrared wavelengths near the visible range. Thirty percent of the incoming solar radiation is reflected back to space in form of infrared radiation. The remaining seventy percent are absorbed, warming the land, atmosphere and oceans. In order for the climate to remain stable the absorbed solar energy must be very closely balanced by energy radiated back to space in infrared wavelengths. One can hence think of the Earth's temperature as being determined by the infrared flux needed to balance the absorbed solar flux. The visible solar radiation mostly heats the surface, not the atmosphere, whereas most of the infrared radiation escaping to space is emitted from the upper atmosphere, not the surface. The infrared photons emitted by the surface are mostly absorbed in the atmosphere by greenhouse gases and clouds and do not escape directly to space. The atmosphere is however not only emitting infrared radiation upwards into space, but also downwards towards the Earth’s surface. The upward infrared flux emitted by the surface therefore has to balance not only the absorbed solar flux but also the downward infrared flux emitted by the atmosphere. The surface temperature will rise until it generates thermal radiation equivalent to the sum of the incoming solar and infrared radiation.[viii]

With an increase of greenhouse gases in the atmosphere global warming occurs, because these gases can absorb more energy and hence emit more infrared radiation down towards the surface. Consequently, the temperature of the surface rises, as does the entire atmosphere. More greenhouse gases therefore lead to more energy being stored in the Earth’s atmosphere, less being emitted back into space, and thus to rising global temperatures.[ix]

Feedback Loops

One of the most pronounced feedback loops involved in the greenhouse effect is related to the evaporation of water. Warming through additional greenhouse gases such as CO2 will cause more water to evaporate into the atmosphere. Since water vapour acts as a greenhouse gas itself, the atmosphere warms further which in turn causes more water vapour to evaporate. This positive feedback loop continues until it is stopped by other processes. The result is a much larger greenhouse effect than one that would occur based on CO2 alone.[x]


Environmental Effects

Observational evidence from all continents and most oceans shows that many natural systems are being affected by regional climate changes in form of temperature increases. Although it is difficult to connect specific weather events to global warming, the IPCC concludes that an increase in global temperatures contributes to broad changes such as glacial retreat, Arctic shrinkage, and a worldwide sea level rise. Changes in rainfall patterns are also likely to be related to global climate change and can result in flooding and drought. There may also be changes in frequency and intensity of extreme weather events such as hurricanes, typhoons and other tropical storms. These changes are then highly probable to lead to species extinctions way up into high levels of the food web. The IPCC estimation asserts that, if increases in global average temperature exceed only 1,5 to 2,5°C approximately 20-30% of plant and animal species currently known will be at increased risk of extinction.[xi]

Even more pressing than these environmental effects of global warming, are perhaps the direct human and social costs related to the changes in climate and weather patterns.

Human and Social Effects

Among the human and social costs likely to occur relative to global warming and changing weather patterns are, to begin with, variations in agricultural yields. According to the United Nations Environment Programme (UNEP) developing countries, most of which are highly dependent on agriculture, will thus be harmed most by such changes. Especially in seasonally dry and tropical regions, crop productivity is projected to decrease for even small local temperature increases (1 to 2°C), which in turn increases the risk of famines. That poor countries suffer most from the effects of global warming is especially perturbing in light of the fact that their actual emissions have been small compared to those of the developed world.

A further projected consequence to occur by 2080 is that people living in coastal regions will experience floods every year due to sea level rise. Here again the population of the developing world will be hurt most, especially those living in the densely populated and low-lying mega-deltas of Asia and Africa as well as those inhabiting small islands.[xii] The recent flooding of the Irrawaddy delta in Burma resulting from Cyclone Nargis that left more than 100,000 dead seems to provide a case in point for the IPCC argumentation.[xiii]

However, developed countries too are to experience unwelcomed consequences; for instance in form of adverse health effects from warmer temperatures. The extraordinarily hot summers 2003 and 2006, when hundreds of people throughout Europe and North America lost their lives due to heat strokes, provide prominent examples in this respect.[xiv],[xv] Another example of how climate change is taking its toll on developed countries could be observed in August 2005, when hurricane Katrina hit the US coast at New Orleans. Katrina was one of the deadliest hurricanes in American history, killing nearly 2,000 people and making several thousand citizens of the Greater New Orleans area homeless when the storm tide that accompanied the hurricane breached the levee system and flooded large parts of the city.[xvi]

Summing up, the lives and health states of millions of people is projected to be affected, through increases in malnutrition, a higher and altered spatial distribution of infectious diseases, and greater frequency of cardio-respiratory illnesses due to rising temperatures and extreme weather events.[xvii] Although it can also be argued, that climate change can potentially bring along benefits too - such as fewer deaths from cold exposure in areas like Siberia and perhaps also changes in range and transmission potential of malaria in Africa - it has to be noted that these benefits will clearly be outweighed by the negative effects, especially in developing countries.[xviii]


The IPCC finds there are various practices and technologies in key sectors, such as energy supply, transportation, industry, and agriculture that should be implemented to reduce global emissions. While no single technology can provide all of the reduction potential in any sector, proposed actions comprise amongst others the following: for the energy sector, use of nuclear, solar, wind, and hydropower, and intensified research on carbon dioxide capture and storage applications; for the transportation sector, use of more fuel-efficient vehicles and aircrafts, advancement of electric and hybrid vehicles with more powerful and reliable batteries, and modal shifts from road transport to rail and public transport systems; for the industrial sector use of more efficient electrical equipment, heat and power recovery, as well as material recycling and substitution; and for the agricultural sector, improved crop and grazing land management to increase soil carbon storage, better rice cultivation techniques to reduce CH4 emissions, and improved nitrogen fertiliser application techniques to reduce N2O emissions.[xix]

A further important innovation that is increasingly attracting attention has been the development of greenhouse gas emissions trading through which companies, in conjunction with government, agree to cap their emissions and to purchase credits from those below their allowances. As the introduction of emissions trading schemes is the focal point of this study, the next section will examine various aspects of the concept in detail.[xx]


[i] Oreskes, N. (2004). The Scientific Consensus on Climate Change. Science, 306 (5702), p.1686.

[ii] IPCC (2007). Climate Change 2007: Synthesis Report. Geneva, Switzerland: Intergovernmental Panel on Climate Change.

[iii] Kolk, A. & Pinske, J. (2005). Business Responses to Climate Change: Identifying Emergent Strategies. California Management Review, 47 (3), pp. 6-20.

[iv] Ibid

[v] UNCED (1992). United Nations Framework Convention on Climate Change. Rio de Janeiro, Brazil: United Nations Conference on Environment and Development. Retrieved, May 30, 2008, from http://unfccc.int/resource/docs/convkp/conveng.pdf

[vi] IPCC (2007). Climate Change 2007: Synthesis Report. Geneva, Switzerland: Intergovernmental Panel on Climate Change.

[vii] Ibid

[viii] Wikipedia (2008a). Greenhouse effect. Wikipedia - The Free Encyclopedia. Retrieved May 30, 2008, from http://en.wikipedia.org/wiki/Greenhouse_effect

[ix] Rodhe, H. (1990). A Comparison of the Contribution of Various Gases to the Greenhouse Effect. Science 248 (4960), pp. 1217 – 1219.

[x] Sinha, A. (1995). Relative influence of lapse rate and water vapour on the greenhouse effect. Journal of Geophysical Research, 100 (D3), pp. 5095–5104.

[xi] IPCC (2007). Climate Change 2007: Synthesis Report. Geneva, Switzerland: Intergovernmental Panel on Climate Change.

[xii] Ibid

[xiii] Denby, K. (2008, May 31). No nets, no rice, no hope. And now Burma's cyclone survivors face a life of debt. Times Online. Retrieved May 31, 2008, from http://www.timesonline.co.uk/tol/news/world/asia/article4036348.ece

[xiv] Bhattacharya, S. (2003, October 10). European heatwave caused 35,000 deaths. NewScientist, Retrieved May 31, 2008, from http://www.newscientist.com/article.ns?id=dn4259

[xv] Munoz, O. (2006, July 28). 139 Deaths Later, Heat Wave Appears Over. CBS News. Retrieved May 31, 2008, from http://www.cbsnews.com/stories/2006/07/28/ap/national/mainD8J58IL80.shtml

[xvi] United States Congress (2006). A Failure of Initiative: Final Report of the Select Bipartisan Committee to Investigate the Preparation for and Response to Hurricane Katrina. Washington D.C., USA: Government Printing Office.

[xvii] IPCC (2007). Climate Change 2007: Synthesis Report. Geneva, Switzerland: Intergovernmental Panel on Climate Change.

[xviii] Ibid

[xix] Ibid

[xx] Ibid


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Vrije University Brussel – Solvay Business School
Carbon Credits Global Emissions Trading Advanced Technology



Title: Carbon Credits and Global Emissions Trading