Q) What do you understand about carbon trading? Critically examine its effectiveness in mitigating the effects of global warming.

Why this question?

China recently started the long-awaited carbon trading scheme.

Key demand of the Question 

Explain what carbon trading is and how it is carried out. Then examine its effectiveness in mitigating the effects of global warming.


Critically examine – When asked to ‘Examine’, we have to look into the topic (content words) in detail, inspect it, investigate it and establish the key facts and issues related to the topic in question. While doing so we should explain why these facts and issues are important and their implications. When ‘critically’ is suffixed or prefixed to a directive, one needs to look at the good and bad of the topic and give a fair judgment.


Start by giving a definition of carbon trading.


In the first part, explain in detail how carbon trading is done.

In the next part, examine its effectiveness in mitigating the effects of global warming..


Conclude with a way forward.

Model Answer

Carbon trading is a market-based system aimed at reducing greenhouse gases that contribute to global warming, particularly carbon dioxide emitted by burning fossil fuels. It allows countries to reduce their own carbon emissions and sell the saved emissions to other countries for money or technology transfer or project investments. Carbon markets existed under the Kyoto Protocol, which is being replaced by the Paris Agreement in 2020.

As an effective strategy:

  1. It achieves the objective of GHG emission reduction at low cost with caps in emissions, sanctions in the form of trade and fines as seen in Kyoto protocol. 
  2. It helps in a more effective way to address global warming with the development of new technologies and technology transfer to utilize the renewable energy potential. E.g., Hydroelectric project investments in countries like Bhutan by India.
  3. Emission trading provides a way of establishing rigour around emissions monitoring, reporting and verification – essential for any climate policy to preserve integrity.
  4. Emission trading results in a synergetic effect by way of integrations and collaborations and collective effort to fight climate change. E.g. an industrial area in a third-tier town may not be able to contribute to climate change if not collaborations with global companies which is facilitated by the emission trading.

However, emission trading has certain disadvantages which has made it an ineffective tool to fight global warming.

  1. It becomes ineffective if the companies have the wherewithal to invest heavily offsetting the carbon price they pay.
  2. Determining physical actions that companies must take, with no flexibility, is not guaranteed to achieve the necessary reductions.
  3. Establishing a regulated price is a policy nightmare and takes years to come to a consensus and also faces a backlash. E.g., Carbon cess.
  4. As accounting the exact emissions is difficult, the issues in emission counting rendered by the developed countries has resulted in just number magic rather than actual reduction in emissions.
  5. Creating a market in something with no intrinsic value such as carbon dioxide is very difficult. 
  6. The low carbon pricing mixed with politics has made the scheme ineffective where in the overall emissions have increased rather than decreased.

Emission trading works on the principle of ‘pay and pollute’. It would be successful only when the carbon reduction price exceeds the profit after carbon emissions. Thus, the idea should be gradually reducing the number of available permits from year to year, transparently/deterring carbon pricing there by nudging firms to increasingly find more ways to reduce carbon emissions.