Carbon trading is a market-based approach to controlling pollution by providing economic incentives for reducing greenhouse gas emissions. It allows companies, governments, or other entities to buy and sell permits or credits that represent the right to emit a certain amount of carbon dioxide (CO2) or other greenhouse gases.
There are two primary types of carbon trading systems:
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Cap-and-Trade System: In a cap-and-trade system, a regulatory authority sets a cap on the total amount of greenhouse gases that can be emitted by all participating entities. Individual companies or organizations are allocated a certain number of permits (or allowances) equal to their share of the cap. If a company reduces its emissions and has excess permits, it can sell those allowances to other companies that exceed their emissions limits. This creates a financial incentive for companies to reduce their emissions.
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Carbon Offsetting: In this approach, companies or individuals can purchase carbon credits that fund projects aimed at reducing or capturing greenhouse gas emissions, such as reforestation, renewable energy projects, or energy efficiency initiatives. These projects generate carbon credits that can be traded or sold in carbon markets.
The goal of carbon trading is to create a financial incentive for reductions in greenhouse gas emissions, ultimately contributing to broader efforts to combat climate change. By putting a price on carbon, it encourages businesses to innovate and invest in cleaner technologies and practices.