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Carbon Permits Trading Essay

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Carbon Permits Trading
2.1 Relevance and organization of emission trading
Greenhouse gases alike water vapor, carbon dioxide, ozone and methane produced by power plants, transportation and factories are considered as the main driver for climate change with devastating impact on nature. Most recent efforts of global players ‘going green’ by offering carbon neutral products are quite unlikely able to stop global warming (John Gapper, 2006 and Heide Bachram, 2004). Hence, its again the governments responsibility to foster emission reductions by means of tagging a price to emission. U.N.’s famous Kyoto Protocol is an agreement on environment and sustainable development which was defined to support and monitor governments’ effort to reduce
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Ellerman, 2004).
Figure 7: The emissions trading economics of two participating countries

The way companies profit from emissions trading is described in figure 7; in this example, the marginal abatement costs (MAC) represents the country specific cost to offset carbon. With Rreq being the required amount of carbon reduction and R the actual carbon reduction, Germany has reduced already more carbon than required (R* > Rreq), whereas Sweden has not reached its cap (R* < Rreq). Hence, Germany can sell their gains (Δ 1 2 3) with a profit in the market, because their marginal abatement costs are lower than the market price (P). Sweden, on the contrary, has not yet reached their reduction target and therefore has to reduce emissions further. Now, Sweden can either reduce emissions internally at their MAC price above the actual market price, or initiate a so called Clean Development Mechanism (CDM) project outside of Sweden at a lower MAC price. By doing so, they actually realize cost savings which can be considered as a commercial benefit (Wikipedia).
Critics of ETS are the high complexity and monitoring of the system, very limited enforcement and, above all, the dispute of initial allocation
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