Within the last few years carbon trading has been at the center of the media and the political spectrum, but is still not very well understood by the average citizen. The carbon trading market was developed by government regulators as a means to reducing the overall greenhouse gas emissions within industries that emit these types of gases.
So you're probably wondering how does carbon trading work? Carbon trading takes place within a carbon trading market such as the European Union Emission Trading Scheme where companies buy and sell emissions credits. For example, the regulators of the European Union Emission Trading Scheme set an aggregate cap on the total amount of carbon that can be released. Then they hand out emissions credits to each company equaling the aggregate total. If a company goes over its emissions limit they can either emissions or buy credits from another business. Businesses with credits to spare can either sell them or bank them for later use.
So we've answered the question how does carbon trading work, now let's focus on understanding the European Union Emission Trading Scheme (ETC). The ETC is the largest carbon trading market in the world and involves several countries and industries. Companies within the ETC are given out emissions certificates for several years at once rather than one year at a time. The current trading period started in 2005 and ended in December of 2007. The second trading period runs until the end of 2012. Within each trading period companies buy and sell emissions credits with the hopes of reducing the levels of greenhouse gases.
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