Carbon Market

What is Cap and Trade?

The carbon market, also known as emission trading or as ‘cap-and-trade,’ is the administrative method of controlling harmful greenhouse gas emissions through an economic approach. Through cap-and-trade, a government or ruling body sets a cap over the amount of pollution that can be emitted by any one company. These same companies are then issued permits for their emissions and will hold a set amount of credits or allowances. Those companies are then mandated to keep their emission levels under the set caps by purchasing credits from other companies who are polluting under their cap. Credits can be created through utilizing renewable energy, agricultural soil carbon, animal waste methane, forestry and landfill waste methane. Transformation of these credits from one company to another is known as a trade. This method of pollution reduction achieves lower greenhouse gas levels at the lowest possible cost to society.

Market Size

With the introduction of a greenhouse gas cap-and-trade scheme in the United States, global carbon markets are projected to be worth $3.1 trillion with volume of 38 billion tons per year by 2020. 

It is estimated that 67% of this volume would be traded with a US based emission trading scheme.

Point Carbon: Carbon Market Transactions in 2020 (May 2008)

Demand 

The United States domestic offset supply in 2012 - the year Federal cap-and-trade programs would enter into force - is projected to be roughly 23.2 million tons.  This is an order of magnitude smaller than projected demand in a federal cap-and-trade system.  The problem gets worse over time as emission caps get tighter while business as usual emissions increase.

Point Carbon:  US Offsets Outlook Supply and Demand (January 2009)

Anticipated legislation would allow covered entities to use domestic offsets for 15% of the emissions cap.  Alternatives to domestic offsets are more costly, such as  international offsets and abatement initiatives.