Carbon markets—basic principles and future developments
Produced in partnership with Navraj Singh Ghaleigh of Senior Lecturer in Climate Law, University of Edinburgh
Last updated on 16/10/2019

The following Environment practice note produced in partnership with Navraj Singh Ghaleigh of Senior Lecturer in Climate Law, University of Edinburgh provides comprehensive and up to date legal information covering:

  • Carbon markets—basic principles and future developments
  • Basic principles
  • Developments
  • EU ETS
  • Paris Agreement—Article 6
  • Kyoto Protocol
  • Brexit, the EU ETS, and the UK ETS

Carbon markets—basic principles and future developments

Basic principles

Carbon markets operate within the ‘science’ of economics, the study of the allocation of scarce resources between competing ends (Lionel Robbins, An Essay on the Nature & Significance of Economic Science (2nd ed, revised and extended, 1949), Ch 1.3).

Within this framework, a decent environment is just such a scarce resource. The core claim of carbon markets is that by assigning property rights to greenhouse gas (GHG) emissions (‘putting a price on carbon’), market actors can allocate the use of this property in a cost-effective way. Accordingly, a given emissions objective (say, reducing emissions by 100% by 2050) is achieved at the lowest cost.

By putting a price on carbon, markets generate climate-friendly incentives such as discouraging the use of carbon-intensive activities, and encouraging investment in the low-carbon economy such that when actors are faced with the social cost of their high-carbon goods and services, they will switch to low-carbon alternatives.

Emissions trading schemes (ETS) are a specific, if increasingly common, form of carbon markets. They recognise the right to emit as tradable property in the form of transferable discharge permits, with a regulator determining the total quantity of allowed emissions (the ‘cap’). Entitlements to emit are distributed in line with the overall cap, and a well-functioning market allows for permit holders (individual sources of emissions) to trade their permits until a

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