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Carbon as a fungible commodity |
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Countries that are obliged under the Kyoto protocol to maintain emission levels of green house gases, can sell their excess emission units to other countries which might have exceeded their limits. This has made carbon a fungible commodity and given rise to the carbon market.
Carbon has been made a fungible commodity due to the relatively new concept of carbon emission trading. This involves emissions trading in carbon dioxide which is leading the field of emissions trading that has emerged due to the provisions of Kyoto protocol. The value of fungible carbon is determined in terms of tonnes of carbon dioxide equivalent, denoted as tCO2e. Carbon emission trading has become an important global issue as countries under the Kyoto Protocol have to resort to it to maintain or reduce their carbon dioxide emission levels.
Under this system, carbon dioxide emissions are measured in transferable units which have been set by various articles of the Kyoto protocol. Acquisition and transfer of these units is tracked and records maintained by registry systems under the Kyoto protocol. This system has given birth to a market of sellable emission units. Article 17 of the Kyoto Protocol allows nations to sell excess emission units, that is, units allowed to them, but not used. In other words, if a country produces less units of emission than that is allowed to it, it will have excess sellable units. This makes carbon a sellable commodity, a novel concept in a world that has learnt to market almost every natural resource. Carbon dioxide being the principle greenhouse gas, the new market is simply known as “carbon market”.
Under the Kyoto Protocol, other sellable units of carbon (and other greenhouse gases) can be transferred. These are the following:
RMU or a removal unit, calculated on land use, changes in land use patterns and forest management.
ERU or emission reduction unit.
CER, Certified emission reduction
These units are all traced and recorded. An international transaction log is maintained to ensure secured and traceable transfer of emission reduction units.
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