Carbon markets are designed to combat climate change by putting a price on carbon dioxide ([CO.sub.2]) and other greenhouse gases, and then allowing companies and other entities to trade the right to emit these gases through permits, credits, or allowances. The emissions total in a state or country is often capped by law; if a company wishes to emit more than allowed under the cap, it can buy permits from another company that has reduced its emissions to below its allocation.
The global carbon market has expanded quickly over the past two years, reaching an estimated total value of US$59.2 billion in 2007, up 80 percent over 2006. The volume of carbon permits and credits traded in 2006 was likely more than double the amount traded in 2005.
Carbon markets can be either mandatory (created by national or regional legislation) or voluntary. The world's largest carbon trading platform, the European Union Emissions Trading Scheme (EU-ETS), is a mandatory program launched by the EU to help it meet Kyoto Protocol-mandated emissions targets. With the EU-ETS, the EU expects to meet its Kyoto targets for $4.3 billion-5.4 billion annually, or less than 0.1 percent of the region's gross domestic product. Without the EU-ETS, compliance costs would be about twice as high.
Despite their promise, mechanisms such as the EU-ETS may not adequately address certain important sources of greenhouse gases, such as deforestation, which accounts for 20 percent of global emissions. However, at climate negotiations in Bali, Indonesia, last December the World Bank announced the creation of a Forest Carbon Partnership Facility, a controversial financial instrument intended to compensate countries for costs they incur to keep existing forests intact.
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