Another method of contolling CO2 emissions is to allocate a certain number of permits to those who are responsible for emissions. A company may be given enough permits to allocate 10,000 tonnes of CO2/year. If a company can improve its efficiency and reduce its emissions below this amount, say to 9,000 tonnes, it can resell its unused permits at a profit. This gives companies a financial incentive to reduce emissions.
Another company may actually increase its emissions, say to 11,000 tonnes, in which it would have to buy permits from someone else to cover this difference. If it does not buy enough permits it is heavily fined. In this manner producers are encouraged to reduce, or at least not to increase, their output of greenhouse gases.
It also benefits the overall economy as the companies who can reduce emissions most cheaply will do so, and sell the excess to others who cannot. This allows a nation's overall targets to be achieved without imposing binding restraints on each individual company.
The European Union has begun its own Emissions Trading Scheme, which allocates a number of permits to companies in the industries that produce most CO2. These permits can be bought and sold anywhere in the European Union, and should help the EU to cut emissions more efficiently than by non-tradeable restraints.
Whilst the introduction of an emissions trading system is welcome there are difficulties about its use in practice. Firstly, the total number of permits allocated must be low enough to actually help in the overall reduction of emissions. As the trading system has only recently been introduced the EU has authorised enough permits to make life comfortable for the scheme's participants. This is understandable in the early stages but will need to be addressed once the scheme has been established.
Secondly, once the overall emissions level has been agreed it is necessary to find a fair way to allocate permits between companies. A natural solution would be to auction the permits so that those who need most will buy most, and would mean that the polluter pays. The EU has chosen to give permits away for free, which makes involvement in the scheme more attractive to industry, but raises questions about justice and fairness.
A distribution of permits based on historical emissions would punish those who are already efficient. An allocation based on future projections would reduce incentives to immediately cut emissions. A system based on the industry's best practice may penalise those who for legitimate reasons cannot be as efficient as their competitors.
The trading system can be effective letting market mechanisms influence industry decisions, but until permits are auctioned this cannot be fully achieved.
Two extensions of the Emissions Trading Scheme have also been proposed. The Clean Development Mechanism involves poorer developing nations cutting their emissions, and selling that reduction to wealthier developed nations. This encourages poorer nations to cut their emissions, as they can sell their cuts at a profit, and would allow worldwide emissions to be reduced even if developed nations could not cut emissions within their own borders.
A similar scheme is Joint Implementation which allows developed nations to work on projects in other developed nations to achieve overall reductions in emissions. The key challenge with these mechanisms is how effectively they can be monitored. The potential for fraud and corruption seems to be considerable, and an overly burdensome oversight may be necessary to maintain integrity.
Another example of CO2 trading can be implemented on a personal individual level. Each of us is responsible for some CO2 emissions. Rather than trying to abandon the use of energy, which is impossible, we can offset our emissions by financing projects which cut emissions elsewhere.
There are many organisations available which offer this personal carbon trading but the price to offset each tonne of CO2 varies considerably between them. One of the lowest priced, CarbonFund.org, promises to offset a tonne of our CO2 emissions for about $3 by planting trees or encouraging the use of renewable energy. They also offer a CO2 calculator to estimate how much CO2 you are responsible for emitting each year, allowing you to estimate how much you need to offset.