The Fundamental Issue with Carbon Deficit Trading

Carbon deficit trading is a technique employed by nations in an effort to reduce their emissions of carbon dioxide. The basic aim is to ensure that countries which pollute less are rewarded financially above and beyond the countries which are heavy polluters. Although this appears to be beneficial to the environment, there’s a fundamental drawback too. Here we discuss the pros, cons, and possible solution to trading carbon deficits.
From: Alpari
October 28th, 2013 | 0 Comments

The Pros

There seem to be a lot of advantages to carbon deficit trading.  In essence, countries who want to emit more carbon dioxide have to buy the right to do so from countries that pollute less.  This means that in effect, countries that are less damaging to the environment are financially rewarded by countries that are more damaging.   

The advantage of this is that environmentally responsible countries are rewarded, which should ideally incentivise the countries which are less helpful to the global effort to lower carbon emissions.

 

The Cons

The main negative point is that just like all financial markets, carbon deficit trading relies heavily on the growth of the market itself.   In carbon trading, this equates to expanding the countries and companies that invest in the market, which leads to inevitable growth.

In the U.S. alone, in 1998 the number of future contracts traded in the commodities market equated to only $630,000,000, but that rose to $3,200,000,000 in 2007.  Unfortunately, the commodities market is tied intrinsically to its value at retail.  Therefore, the rise in the value of carbon deficits led to the rise in utility bill prices, making it far more difficult for consumers to pay their bills.   

 

The Solution to Trading Carbon Deficits

In February of this year, the U.S. Government passed a bill through congress to help reduce the excessive speculation in energy commodities.  This recognises that mass investment in the market is detrimental to the environment, and also the economy.  The bill bans the trading of commodities by investors who are not excluded investors, thereby reducing the number of trades made.

Ultimately, although the theoretical premise of carbon deficit trading is positive, as we have seen, it causes more problems than it is worth.  As for the bill, it will take some time to see its benefits, but it can surely do no more harm than if it didn’t exist.  In the meantime, if you’re interested in a basic introduction to trading commodities, have a look at contracts for difference trading, which is a good way if introducing yourself to commodities trading as it is low-cost.