Cap-and-trade and project-based framework: How do carbon markets work for greenhouse emissions reduction?

Abstract

There are two examples of carbon market mechanisms: i ) trading based on the cap-and-trade principle establishes Greenhouse Gases (GHG) emission limits for companies that can negotiate allowance to pollute (as in European Union Emission Trading Scheme, EU ETS) , and ii ) carbon credits, project-based emission reductions of GHG (such as the Clean Development Mechanism of the Kyoto Protocol, CDM). Given the importance of these two, this paper presents the dynamics of the evolution of carbon markets evolution by analyzing different markets (including other examples) and their framework, performances, potential and barriers. Besides these two programs, other national and regional systems are being developed, bu EU ETS and Kyoto stand in terms of volume and visibility. Despite existing criticism, in some countries volume of GHG emissions decreased between 1990 and 2011, probably influenced by the modernization of some formerly obsolete and inefficient industrial plant, and also by the poor performance of world economies in recent years.