A personal carbon-trading scheme went on trial last week with shoppers at BP able to use Nectar cards to track their fuel usage and carbon dioxide output, but a larger scheme for industry is already regarded as a failure. Sarah Lewis looks into cap-and-trade.

Got, got, need, swap...
Emissions trading, also called cap-and- trade, is exactly as the name suggests.

The right to emit pollutants is traded between those who need to, within a polluting limit set by a governing body. If you emit less than your permit allows, you can sell the remaining credits on, giving people and companies a financial incentive for polluting less.

Emit more than your allowance and credits must be bought - a penalty for not being clean enough.

The total amount of permits is gradually reduced over time.

The idea is those who can reduce their emissions quickly and cheaply will do so - and the system will be a catalyst for low-carbon innovations.

A trade for all pollutants
While greenhouse gases are the obvious case for emission trading, there are several different pollutant markets operating at the moment.

America's Environmental Protection Agency has clean-air markets, where sulphur dioxide and nitrogen oxides are traded to help reduce acid rain. One state has a market for trading volatile organic compounds, such as methane and benzene.

The largest carbon-trading market is the European Union Emission Trading Scheme (EU ETS) with 25 of 27 member states participating, including the UK.

Who does it apply to?
At the moment, it is the big polluters which are included in the EU ETS, such as power-generating companies and the steel, cement and ceramic industries, which are responsible for about 40% of all the EU's greenhouse gas emissions.

The airline industry, already stricken by the rising price of oil, will be included by 2012, capping their carbon dioxide output at 2004-2006 levels. This will apply to flights taking off or landing within an EU country, with those exceeding the imposed limits at risk of legal recourse.

However, the World Wide Fund for Nature (WWF) points out that since 1990, greenhouse gas emissions from EU aviation has doubled, so using 2004 to 2006 as a baseline makes the legislation "a Christmas gift to the aviation industry".

Big business to the rescue...
Despite the general feeling among eco-types that big business is to blame for our environmental ailments, those involved in carbontrading insist creating a whole new business is the only realistic way to bring emissions down.

Arthur Tait is a London-based emissions trader. He says: "I think it'll save carbon a lot more efficiently than a carbon tax would.

A market-driven force is probably the only way we are going to save the planet."

Even the notoriously hard to please campaign group Friends of the Earth (FoE) said, at the launch of the EU ETS in January 2005, the scheme was the "most important piece of climate change legislation anywhere in the world to date".

...Or a trade in hot air?
But FoE's excitement was quickly deflated when the UK took a last-minute decision to increase its allocation of carbon credits. This led to widespread confusion and UK industry was not ready to begin trading with the rest of the EU.

Many environmental campaigners say cap-and-trade is simply a political and industry-led sleight of hand which doesn't really do anything to reduce emissions - but does everything to make the rich richer.

In 2007, the World Bank estimated the global carbon market had doubled in value since the year before, making it worth $64 billion.

Yet in the UK, carbon emissions are still only one per cent below 1997 levels. In 2006, the price per tonne of carbon fell dramatically from 30 euros to 0.63 euros - about 50p - as there were too many permits allocated to the market. Even though the number of allowances were cut in 2007, industry still emitted 1.88bn tonnes of carbon dioxide, compared to an allowance of 1.91bn.

Money for nothing
Throughout Phase 1 of the ETS, which ended this year, all those industry sectors which required credits were given them free of charge. Since companies with unused credits could then sell them on, they were essentially being handed free cash.

In the case of power-producing companies, the costs of the new trading scheme were passed on to customers, while at the same time the companies themselves received billions of pounds of windfall profit from the sale of excess credits.

Channel 4's economics correspondent, Faisal Islam, says this led to City analysts routinely recommending buying shares in power companies and other heavy carbon polluters, creating yet more profit for the biggest polluters, without seeing a corresponding drop in emissions.

Returns for the layman
Phase 3 of the scheme, which starts in 2012 (we are currently in Phase 2 limbo), provides the opportunity for fixing the mistakes of Phase 1.

Permit allocation is tighter and, rather than being handed out for free, current plans say credits will be auctioned off.

The effect of this should be an estimated £200 billion haul and, rather than it disappearing off into the mysterious depths of the Government's wallet, the Chancellor of the Exchequer Alistair Darling has been heard to comment the money raised could be used "to do other things to help with climate change - for example, transport".

But not quite
That still leaves the £9 billion in profit these companies will see during Phase 2 before the 2012 auctions come into effect.

Darling openly admits these profits are wrong. But the fear of businesses taking their investment out of Europe is crippling and the money made in free credits thus far appears to have been nothing short of a several-billion-pound bribe to induce reluctant businesses into the carbon-trading scheme in the first place.

So what next?
The Stern Report says spreading cap-and-trade across the world is the only way to save it from itself, but the European Union's efforts have so far been hailed at best a farce and at worst a complete failure.

Phase 3 should bring with it stricter cuts and an exciting pot of money for green initiatives. All that is needed is for the EU to stand up to the corporate lobby and not water down the proposed legislation. As Faisal Islam says: "It's down to the world's politicians to show that this is not just hot air."

  • This month, a personal carbon-trading trial launched, allowing 1,000 Nectar card holders filling up at BP garages to record how much fuel they use.

Each volunteer is given a monthly allowance and can then sell or buy further credits on a website called CarbonDAQ.

Participants start with 42 credits, each worth 10kg carbon dioxide, about the equivalent of five tonnes of CO2 a year.

The aim is to end the month with a positive or zero balance, through careful use and clever trading.

The trial is being run by the Royal Society for the encouragement of Arts, Manufactures and Commerce, to show a personal trading scheme is not only possible, but does not require complicated new infrastructure.

Trade for yourself at http://carbondaq.rsacarbonlimited.org