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What is the carbon economy?
What is the carbon economy?
The current GHG emission reduction policies predominantly concern the implementation of limitation and asset trading mechanisms. These trading mechanisms mainly focus on assets which are linked to CO2 emissions and constitute the carbon economy. An international regulation defined by States under the aegis of the United Nations sets the principles, objectives and obligations imposed on the actors involved in the carbon economy.
A flexible mechanism
Tools used by policies which set carbon emission caps for States or industrial manufacturers, or voluntary commitments in some cases, permit markets have the advantage of being flexible. They enable the actors concerned to achieve an economic trade-off between internal emission reductions and the sale or purchase of permits on a market, so that emissions are reduced at the lowest economic cost.
However, the incentive to reduce emissions, proportional to the GHG emission price, primarily depends on the policy regulator who can increase the pressure on emissions by lowering the total volume of distributed carbon assets.
The Kyoto Protocol does not impose emission-reducing commitments on all countries. It has introduced project mechanisms which progressively involve developing countries in the emission reduction process. The purchase of credits thus generated by projects enables the transfer of finance and technology.
Different types of carbon assets
In concrete terms, these are both greenhouse gas quotas and emission reductions which are traded and which constitute “ carbon assets ”. There are three types :
- Assigned Amount Units (AAU) allocated to the Signatory States of Annex I of the Kyoto Protocol. The allocation of AAU between 2008 and 2012 enables the countries to cover their emissions corresponding to their emissions cap. France has set itself an emissions cap of 565 million tonnes of CO2equivalent per year for the period 2008-2012.
- greenhouse gas emission quotas allocated to industrial manufacturers within the framework of a quota market. This concerns, for example, industrial plants covered by the European CO2 quota market, to which the European Commission annually distributes, on the same principle as the emissions cap, European quotas called European Union Allowances (EUA).
- credits called CER (Certified Emission Reduction) which correspond to emission reductions achieved via a reduction project. The reduction achieved is calculated in relation to a reference scenario. They are issued within the framework of “ project mechanisms ”. This notably covers the Clean Development Mechanism (CDM) established by the Kyoto Protocol. These reductions are verified and validated by the United Nations.
Accounting and trading infrastructures
The development of the carbon economy is based on the setting up of infrastructures which are adapted to this new market, allowing for the most efficient distribution of emission-reducing efforts to be achieved :
- national registries put into place in each of the 27 European countries record the quota allocations and the verified emissions of each industrial plant involved in the European market;
- stock exchanges, of which there are five in Europe, facilitate the trading of quotas between operators thanks to the creation and support of compensation chambers which guarantee the transactions;
- financial intermediaries enable all industrial manufacturers to trade quotas.
