The Carbon Credits Market
In step with the dramatic rise in CO2 emissions and other pollutants in recent years, a variety of new financial markets have emerged, offering businesses key incentives — aside from taxes and other punitive measures — to slow down overall emissions growth and, ideally, global warming itself. A key feature of these markets is emissions trading, or cap-and-trade schemes, which allow companies to buy or sell “credits” that collectively bind all participating companies to an overall emissions limit. While markets operate for specific pollutants such as greenhouse gases and acid rain, by far the biggest emissions market is for carbon. In 2009, the trade market for CO2 credits hit $70 billion worldwide — more than double the amount from 2006.

How it works?
Emissions limits and trading rules vary country by country, so each emissions-trading market operates differently. For nations that have signed the Kyoto Protocol, which holds each country to its own CO2 limit, greenhouse gas-emissions trading is mandatory. In the United States, which did not sign the environmental agreement, corporate participation is voluntary for emissions schemes such as the Chicago Climate Exchange. Yet a few general principles apply to each type of market.

Why it matters?
Industry analysts say carbon markets will continue to grow at a fast clip — especially in the United States, where Fortune 500 powerhouses such as DuPont, Ford, GM, IBM, and many others are voluntarily capping and trading their emissions. Even though a national cap on carbon emissions doesn’t yet exist in the United States, most consider it inevitable, and legislators are already pushing the issue in Congress.
 

Public Opinion - Image - and Profitability
It’s not just governments who are demanding emissions compliance — consumers want it, too. The commitment a company makes to curb its pollutant output is an increasingly public aspect of strategy. More and more employees are taking these factors into account when deciding where to work. A recent study found that 80% of young professionals want their work to impact the environment in a positive way, and 92% prefer to work for an environmentally friendly company. Let’s say a company can’t afford to modify its operations to reduce CO2. Purchasing carbon credits or offsets buys it time to figure out how to operate within CO2 limits. For others, it can be a cost-effective tool to help lower emissions while earning public praise for the effort. Each credit a company buys on the Chicago Climate Exchange — usually for about $2 each — means another company will remove the equivalent of one metric ton of carbon.

The Advantages
Companies in different industries face dramatically different costs to lower their emissions. A market-based approach allows companies to take carbon-reducing measures that everyone can afford. The private sector is better at developing diversified approaches to manage the costs and risks of reducing emissions. Installing cogeneration CHP solutions and lowering energy consumption is usually good for the core business. For example, in 1997 the British energy company BP committed to bring its emissions down to 10% below 1990 levels. After taking simple steps like tightening valves, changing light bulbs, installing CHP plants, and improving operations efficiency, BP implemented an internal cap-and-trade scheme and met its emissions goal by the end of 2001, nine years ahead of schedule. Using the combined CO2 reduction strategy, BP reported saving about US$ 650 million.

Then there’s the long-term investment angle: Buying into the carbon market boom now suggests significant dividends later on. Carbon credits are relatively cheap now, but their value will likely rise, giving companies another reason to participate.