Carbon Markets
International business guide to allowances, offsets and registries.
Summary
The reference has not verified this book in detail; the summary states only what the title, author and subject establish.
Brohe, Eyre and Howarth wrote a practitioner and student reference on carbon markets, covering the mechanisms, the instruments and the operation of the schemes existing around 2009. The reference has not verified the detailed contents.
The subject divides into distinct systems. Cap and trade schemes set a total limit on emissions, allocate or auction allowances covering that total, and permit trading so that reductions occur where they are cheapest. The European Union Emissions Trading System was and remains the largest, and its early phases were characterised by over-allocation of free allowances, which collapsed the price and produced windfall profits for recipients who had received allowances free and passed the notional cost through to customers.
Offset mechanisms permit emitters to fund reductions elsewhere in place of reducing their own. The Kyoto Protocol's Clean Development Mechanism was the main such system, and the recurring problem is additionality, meaning whether the funded reduction would have occurred anyway, which cannot be verified with certainty because it requires establishing a counterfactual.
The volume would also cover baseline setting, monitoring and verification, registry infrastructure, the voluntary market and its standards, project development and finance, and carbon taxes as the alternative instrument.
The field has changed substantially since 2009. The European scheme was reformed with a market stability reserve, prices rose substantially, the Clean Development Mechanism was largely wound down, Article 6 of the Paris Agreement established a new framework, and voluntary market credit quality has been the subject of extensive criticism. Readers should verify current market structure and rules.
Key takeaways 7
- A cap and trade scheme sets a quantity limit and lets the price emerge, while a carbon tax sets a price and lets the quantity emerge.
- Trading allows reductions to occur where they are cheapest, which is the entire efficiency argument for the instrument.
- Free allocation of allowances produced windfall profits for recipients who passed the notional cost through to customers.
- Over-allocation in the European scheme's early phases collapsed the allowance price and removed the abatement incentive.
- Offset additionality requires establishing what would have happened otherwise, which cannot be verified with certainty.
- Monitoring, reporting and verification infrastructure determines whether a scheme's reported reductions are real.
- The market structures described are from 2009 and have been substantially reformed since.
Who should read it
Practitioners entering carbon markets who need the mechanism design and instrument basics, verified against current rules and prices.
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Where it sits in the reference 2
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