Climate change is an environmental issue that has become a global concern affecting all nations. To this end, countries worldwide are taking collaborative measures to mitigate the problem. For example, the Kyoto Protocol, which has been ratified by more than 100 countries (read: a dramatically lower number are formally bound) includes many regulations and initiatives whose objectives are to help reduce greenhouse gas emissions. One popular initiative that the Kyoto supports is carbon credits, also known as carbon offsets (which is actually a form of regulatory tax since someone has to pay a carbon tax to provide the credit part of the carbon credit system.)
Carbon credits are measured per metric ton of carbon dioxide emissions or its equivalent in other greenhouse gases. Typically, a government or an international body establishes a system that sets a limit, known as a cap, on the total amount of emissions from all participating countries. Participants are given equal allowances, or credits, based on the cap system. (There is a problem determining carbon caps because there is minimal agreement and integration among groups and regulatory bodies about implementation time frames and use of tax proceeds that creating carbon credits. This issue goes beyond the scope of this article.)
Participants (generally read Companies) are then organized into groups. If participants need to exceed the cap, they have to buy carbon credits from other groups who have unused credits, at a value set by the market. Simply put, carbon emissions are treated as commodities that can be traded between participants, while the total number of credits being traded in the market must not exceed the total cap.
Reward-Penalty System
The overall objective of carbon credits trading is to encourage companies to reduce their greenhouse gas emissions. Those that do not exceed their cap may sell their unused credits in the market or directly to other companies that have to exceed their cap. This implies that those that do not exceed their cap are rewarded by being able to sell their credits; while those that are not able to control their emissions are penalized and have to pay the price.
The Kyoto Protocol has created a system of trading caps among its signatory countries (a total of 181 countries, which include Russia, France, Germany, Canada, Norway, United Kingdom, India, to name just a few). Basically, the cap requires countries to reduce their emissions 5.2% below their 1990 baseline over the 2008 to 2012 period. The total amount of carbon credits to be allocated among countries is determined by the Clean Development Mechanism (CDM) and Joint Implementation (JI) projects, which allow for the creation of credits through emission-reduction projects.
In some countries, cap-and-trade systems patterned after the Kyoto Protocol are being employed alongside policies that aim to reduce greenhouse gas emissions. For example, the United States has several carbon measures in place, such as the Regional Greenhouse Gas Initiative (RGGI), the Western Climate Initiative (WCI), the Chicago Climate Exchange (CCX), and an initiative provided for by the Global Warming Solutions Act of 2006 in California.
Proponent Viewpoint
Proponents point out that the world at large has to start somewhere to arrive at a system that begins to reduce greenhouse emissions. They argue that carbon credits offer the best intermediary solution until that time comes when a more definitive and viable system is put in place. They also praise the carbon credit process because it is governed by a global marketplace, as opposed to other more bureaucratic and self-serving schemes. Advocates say reducing greenhouse gas emissions and mitigating climate change should be a collective effort. Governments have responded by making carbon credit trading a more lucrative way of enticing industries to do their share in solving a global problem.
Opponent Viewpoint
Parties opposed to the carbon credit system argue that it is a counterproductive measure that unfairly penalizes consumers and businesses compared to using tax incentives or tax credits. Opponents also argue that a cap-and-trade system is another way for politicians and their governments to get more money for causes their lobbyists prefer and not necessarily do what is best for the country as a whole. They argue that alternative energy sources should be subsidized until technology and scale of application results in lower prices that makes renewable energy affordable. They believe that governments are exploiting the situation and plan to raise taxes for non energy purposes.
Most countries agree that there are environmental and health benefits to be gained in moving toward a greener business environment. Given this position, the conversion to some renewable energy policy is probably inevitable. The overwhelming concern, however, has to do with how these policies will be executed. The timing and total costs (direct and indirect) of the changes are not clear. At the root of this concern is the uncertainty about which groups will benefit and which groups will suffer. But one thing is certain: With congressional leadership favoring the acceleration of greener energy in a way that benefits their constituents and lobbyists, there will definitely be winners and losers.
What the carbon credit discussion points to is the urgency for business to begin planning NOW for the inevitability of a greener world. Those businesses that prepare for it will prosper; those that do not will suffer the consequences.
Bottom line? - Stop Profit Leaks. Apply this information to improve your profitability, re-engineer business models, and strengthen or gain competitive advantage in the marketplace. And apply the free Fiscal Test at http://fiscaldoctor.com/fiscaltest.html
From Gary W Patterson, http://www.FiscalDoctor.com Copyright 2008
Article Source: http://EzineArticles.com/?expert=Gary_W_Patterson
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