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Day 71 – Q 2.What is carbon trading? How does carbon trading occur? Is it an effective strategy to mitigate the effects of global warming? Critically examine.

2. What is carbon trading? How does carbon trading occur? Is it an effective strategy to mitigate the effects of global warming? Critically examine.  

कार्बन ट्रेडिंग क्या है? कार्बन ट्रेडिंग कैसे होती है? क्या यह ग्लोबल वार्मिंग के प्रभावों को कम करने के लिए एक प्रभावी रणनीति है? समालोचनात्मक जांच करें।


Carbon trading is a market-based system aimed at reducing greenhouse gases that contribute to global warming, particularly carbon dioxide emitted by burning fossil fuels.


Carbon trading allow countries to reduce their own carbon emissions and sell the saved emissions to other countries for money or technology transfer or project investments. Carbon markets existed under the Kyoto Protocol, which is being replaced by the Paris Agreement in 2020.

E.g. A developed country like USA which is unable to meet its reduction target can provide money or technology to the Tidal energy project in Indonesia, and thus claim the reduction of emission as its own.

Alternatively, the Tidal energy investors can make the investment, and then offer on sale the emission reduction, called carbon credits. Another party, struggling to meet its own targets, can buy these credits and show these as their own.

As an effective strategy:

Any emission reduction is a step closer to tackle global warming and carbon trading scheme helps in the same.

  • It achieves the objective of GHG emission reduction at low cost with caps in emissions, sanctions in the form of trade and fines as seen in Kyoto protocol. 
  • It helps in more effective way to address the global warming with the development of new technologies and technology transfer to utilize the renewable energy potential. E.g. Hydro electric project investments in countries like Bhutan by India.
  • Emission trading provides a way of establishing rigour around emissions monitoring, reporting and verification – essential for any climate policy to preserve integrity.
  • Emission trading results in a synergetic effect by way of integrations and collaborations and collective effort to fight the climate change. E.g. an industrial area in a third-tier town may not be able to contribute to climate change if not collaborations with global companies which is facilitated by the emission trading.

However, emission trading has several disadvantages which has made it an ineffective tool to fight global warming.

  • It becomes ineffective if the companies have the wherewithal to invest heavily offsetting the carbon price they pay.
  • Determining physical actions that companies must take, with no flexibility, is not guaranteed to achieve the necessary reductions.
  • Establishing a regulated price is a policy nightmare and take years to come to a consensus and also faces a backlash. E.g. Carbon cess.
  • As accounting the exact emissions is difficult, the issues in emission counting rendered by the developed countries has resulted in just number magic rather than actual reduction in emissions.
  • Creating a market in something with no intrinsic value such as carbon dioxide is very difficult. 
  • The low carbon pricing mixed with politics has made the scheme ineffective where in the overall emissions have increased rather than decrease.


Emission trading works on the principle of ‘pay and pollute’. It would be successful only when the carbon reduction price exceeds the profit after carbon emissions. Thus, the idea should be gradually reducing the number of available permits from year to year, transparent/deterrent carbon pricing there by nudging firms to increasingly find more ways to reduce carbon emissions.

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