The carbon offset market is growing, spurred by businesses and consumers who want to lessen their carbon footprint by investing in ventures like hydroelectric power or forest regeneration. Two experts on carbon credits took your questions.
How are the original carbon credits allocated [in a cap and trade system]? I heard that carbon emitters, such as power producers who generate electricity by burning fossil fuels, would get credits to trade?
Dan Kammen responds:
Great question! The debate on this point is getting fierce. Some schemes to develop climate protection legislation propose that all the credits would be auctioned, raising money for the government to invest or allocate to programs and projects that reduce emissions (such as the development of solar energy, wind farms, or other sources of low-carbon energy supply, or to help with energy efficiency programs). These schemes are considered to be ones that 'have teeth'.
Some schemes are vague on how the credits will be allocated, and some propose that the credits be given away. A major worry if credits are given away is that the very companies that most need to reduce would get these 'freebies'. Some credits may be given away in useful ways, however, such as being awarded to low-income housing developments to offset energy bills, or to groups that re-invest in valued social or environmental services.
Caitlin Sparks responds:
Under a cap and trade, the largest emitters are allocated a certain number of credits per year, which represent the amount of greenhouse gases they are allowed to emit during that same time period. If they emit more that they have been allocated, they must purchase additional credits from another credit owner, who has managed to reduce below the amount of the cap, and thus has credits to spare. In effect, those who don't reduce are penalized -- they must purchase credits -- while those who do reduce are rewarded from the sale of their surplus. The theory is, those who can most cost effectively reduce will do so and at the least economic impact to society.
The question remains: How should the credits be allocated? Should they be given away, in equal percentage, to all emitters? Should amounts be based on past levels of pollution? Or rather on estimated future reductions? Should they be auctioned to the highest bidder?
Obviously this is an important component of cap and trade design: The number of allocated credits effectively determines their price, which shapes the subsequent evolution of the market. The debate between auction and free allocation is unresolved, and it remains unclear what tactic the U.S. will choose, but at this point most agree that a mix of both is the most practical option.
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