Isra-Mart srl: Nature of carbon trade

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Most view the environment in its simplistic sense – that it is the overall summation of all things natural. In this context, as Nobel laureate Amartya Sen observes, the pervasive common view is this state of nature will remain without change as long as we interfere with it as little as possible. Sen says this misconception can be rejected on two counts, the first being that the value of the environment does not lie in its existing state but in the opportunities it offers humankind, and the second, it is not sufficient to ensure that the environment is passively preserved by us but there needs to be active initiatives in educating the populace on the environment and the benefits accrue to it by our actions such as reducing the population and creating employment opportunities.

In this context, education is a paramount factor that would make us more environmentally conscious. A third factor to Sen’s au fait treatise is economic instruments brought to bear with a view to reducing pollution, particularly in the global warming context would be essential to meet the reality that, no matter what we might do to avoid interference with the environment by our enforced inactivity, the growth of world trade would force us to impose economic measures to curb greenhouse gas emissions. It is in this context aviation and carbon trading become important. The essential philosophy of emissions-trading in environmental protection is based on a certain flexibility allowing market forces to reach the lowest cost involved in an operation whilst at the same time achieving an environmental target which has been already set.

The word trading correctly denotes an exchange, and when applied to the aviation context means a certain trade-off between airlines whose fleets pollute more than others and low polluting airlines. The trade-off could take the form of a purchase by the high polluting airline of the reduction level of a low polluting airline. Emissions-trading would encourage airlines to seek innovation in technology and to reduce their emission levels.

The subject of emissions-trading falls within the purview of the Intergovernmental Panel on Climate Change (IPCC) established in 1988 by the World Meteorological Organization and the United Nations Environment Program (UNEP) to assess the scientific basis and impact of climate change. Its first scientific report published in 1990 recommended the negotiation of a framework convention to combat global warming. The United Nations Framework Convention on Climate Change (UNFCCC) was adopted on May 9, 1992 and the treaty entered into force on March 21, 1994.

The UNFCCC or FCCC is an international environmental treaty produced at the United Nations Conference on Environment and Development (UNCED), in Rio de Janeiro 1992. The treaty aimed at reducing greenhouse gas emissions to combat global warming. The treaty as originally framed set no mandatory limits on greenhouse gas emissions for individual nations and contained no enforcement provisions; it is therefore considered legally non-binding. Rather, the treaty included provisions for updates (called “protocols”) that would set mandatory emission limits. The principal update is the Kyoto Protocol which has become much better known than the UNFCCC itself.

“The stated objective is “to achieve stabilization of greenhouse gas concentrations in the atmosphere at a low enough level to prevent dangerous anthropogenic interference with the climate system.”

Emissions-trading is explicitly addressed in Article six of the Kyoto Protocol which states that for the purpose of meeting its commitments under Article Three, any Party included in Annex one may transfer to or acquire from, any other such Party emission reduction units resulting from projects aimed at reducing anthropogenic emissions by sources or enhancing anthropogenic removals by sinks of greenhouse gases in any sector of the economy provided the parties concerned approve of such trading; and, inter alia, such trading actually results in a reduction in emission by sources.

The Third Conference of the Parties to the United Nations Framework Convention on Climate Change was held from December 1 to 11, 1997 in Kyoto, Japan.

Significantly the parties to the Convention adopted a protocol (Kyoto Protocol) on December 11, 1997 under which industrialized countries have agreed to reduce their collective emissions of six greenhouse gases by at least five percent by 2008-2012.
Carbon trading

Carbon trading, which is a species of the genus emissions trading is essentially market based and is usually based on a model that first requires an environmental authority to decide on an acceptable level of overall emissions. The level, or target, once identified, gives rise to permits which are issued consistent with that target, each of which confers the right to release a certain amount of pollution over some period of time. The firms which are issued with these permits, be they airlines or other service and goods providers, may apply these permits to their own emissions, sell excess permits to other pollution sources.
Offsets

Carbon trading essentially involves purchase contracts whereby one party pays another party in return for greenhouse gas (GHG) emissions reductions or for the right to release a given amount of GHG emissions, the buyer can use to meet its compliance or corporate objectives concerning climate change mitigation.

Carbon transactions may either take the form of allowance based transactions where -the buyer purchases emission allowances created and allocated by regulators under cap-and-trade regimes, or under Project-based transactions, in which the buyer purchases emission credits from a project that can verifiably demonstrate GHG emission reductions compared with what would have happened otherwise.

Another aspect to carbon trading is carbon offsetting, which is the compensating for carbon emissions resulting from human activity. Simple human activity such as putting on a cooker or electric iron involves the production of carbon emissions that contribute to climate change. Offsets are traded in the carbon market.
Trade consequences

There will be palpable trade consequences as a result of the Kyoto Protocol. There is little doubt that greenhouse gas emission reduction will affect various sectors in the world economy, notably energy, production and transport. The commitment and action of States coming within Annex one to the Protocol that is calculated to meet GHG reduction targets assigned to them will affect the cost of production of traded products which will in turn affect their competitiveness in the world market.

Overall trade and investment will be adversely affected as a result of the reduction in Annex I countries of the production of GHG intensive products. The result will be a lowering of the demand for industrial goods and services elsewhere leading to a decrease in the growth of overall trade and investment.