The subject or commodity traded in carbon trading is carbon right, which could be a permit to emit carbon or a carbon emission reduction effect. The measurement unit would be the carbon dioxide equivalent per ton (tCO2e).

There are two types of carbon trading markets, which the allowance, pricing and fate of carbon rights in different markets are different as well.

The first type of carbon right: The mandatory market. It refers to the carbon right mechanism in the cap-and-control emissions trading. The government would set up a reduction target, and the users are allow to see emissions as a leverage (carbon right) to distribute to the regulated ; With these carbon right as the target, carbon trading can be proceed.

The cap-and-control emission trading is mandatory which the regulated person must achieve the assigned emission target. The carbon right that is under this mechanism is labeled as mandatory mechanism. The market that circulates and trades mandatory carbon right is called the regulated market.

Every carbon pricing is at first based on the regulated market. For example: Determine the goal of lessening carbon, controlling the coverage and distributing the carbon right. Then based on the needs between each side the price is being adjust, which means there’s no stable price for carbon pricing.

When the country establishes a goal for reducing carbon, trading carbon right plays an important role for it. That’s why each regulated market is sealed and can’t be bought by people who is regulated using it to disclaim one’s responsibility. Carbon right can’t be transfer through different regulated market, so it is like wise that it can’t be balanced by buy low sell high strategy.

Also providing carbon right is an strictly process which lessen the problem of double counting. Every carbon pricing is at first based on the regulated market. For example: Determine the goal of lessening carbon, controlling the coverage and distributing the carbon right. Then based on the needs between each side the price is being adjust, which means there’s no stable price for carbon pricing.

The second type of carbon right: carbon rights in the voluntary market.

It may be thought that it is a free market to buy and sell. Actually, it’s not. 

Voluntary markets are mostly supplementary mechanisms to mandatory markets, and are one of the policy tools for carbon management.

In addition to cap emissions trading, the state also allows “non-regulated parties” to implement emission reduction projects to obtain carbon emissions.

For example, whether to buy green electricity and buy carbon rights at the same time are belong to this category.

The carbon right under this mechanism is usually called a credit reduction, which represents the certified reduction effect, and the market for trading this amount is the voluntary market.

Author

Professor Wei-Keng Lin

Education｜Ph.D., University of Maryland

Occupation｜Professor, National Tsing Hua University 

Specialty｜Electronic package heat dissipation, Heat pipe, Loop heat pipes(CPL，LHP，PHP), Energy-saving design, Solar heat storage and cooling, Heat flow system, Cooling of electronic components, Two-phase flow, Heat transfer elements of artificial satellite and high-altitude flying object