The business of carbon trading

Tomorrow's energy white paper could see it made mandatory for thousands more British businesses, and Tony Blair is trying to persuade world leaders to spread the idea around the world.

Yet in Europe, where carbon trading has been pioneered, billions of pounds have been made without any cuts in emissions. And beyond Europe, it is putting power and profit in unusual hands.

Carbon trading

Carbon trading is a process by which companies receive a financial incentive to reduce their carbon emissions.

Companies and other groups that emit pollutants are given a certain number of "credits" or "allowances" by the government, which represent the right to emit a specific amount.

Those who pollute beyond their allowances must buy credits from those who emit less carbon than their allowances - or face penalties. This is referred to as a "trade".

In this way, companies which can easily reduce emissions have an incentive to do so and those for which it is more difficult will have to buy credits - which help keep the trading system afloat.

The main problems with carbon trading are the difficulty of monitoring levels of emissions and the enforcement of allowance limits. Another criticism is that once a large amount of credits are issued by the government, the price will bottom out and the incentive to trade will be removed.

Carbon offsetting

Carbon offsetting is the practice of compensating for an environmental "ill" by paying for an environmental "good".

The most common example is that of compensating for air miles flown, which produce carbon emissions, by paying for a tree or trees to be planted, which absorbs carbon emissions.

Offsetting of this kind is usually voluntary and processed through a commercial carbon offset provider.

Controversies over carbon offsetting include the indirect nature of offsets, which makes it difficult to verify their compensatory value, and the lack of regulation of the companies which claim to provide offsets.

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