The cost of carbon
By Fiona Wagner • Bankrate.com

Hurricanes. Floods. Rising temperatures. Melting glaciers. These are all symptoms of climate change. It's arguably one of the most serious threats facing the globe today. Growing concentrations of greenhouse gas, or GHG, emissions, such as carbon dioxide from burning fossil fuels, are trapping heat within our atmosphere. And according to the latest research, humans are largely to blame.

While the majority of climate scientists now agree on the nature of problem, the bigger question remains: What are we to do about it?

"We have to absolutely reduce emissions and we have to do it quickly," says John Bennett, executive director of ClimateforChange.ca. "It's not a matter of weaning yourself off something. We have to really go cold turkey because the science is dictating that we need rapid reductions in emissions."

The policy perspective
In 1997, leaders from more than 160 countries met in Japan to work out a deal that would collectively reducing global GHG emissions by at least five percent below 1990 levels by 2012. The resulting document, the Kyoto Protocol, set legally binding individual targets or reduction commitments for each participating country.

Under the previous Liberal government, Canada promised to reduce GHG emissions to six percent below 1990 levels. This commitment was eventually ratified in 2002, but since then, politicians, industry insiders and environmentalists have consistently argued on how to proceed. Critics argued the announced cuts were arbitrary and made without any plan to achieve them.

Canada's reduction challenges are many: a growing population, a robust economy, a cold climate, a powerful oil and gas industry and increasing emissions -- already 30 percent above our Kyoto commitment. But the economic case for immediately reducing emissions is real.

According to the 2006 Stern Review Report on the Economics of Climate Change, the cost of abating climate change would total one to three percent of the global Gross Domestic Product, or GDP, whereas the cost of doing nothing would skyrocket to 20 percent.

One way to reduce global GHG emissions is by market-oriented regulations, such as offsets and emissions trading.

An introduction to carbon finance
Emissions reduction credit trading, or carbon trading, is similar to conventional commodity trading except instead of a barrel of oil, the right to emit carbon dioxide is being bought and sold. Trade in global carbon markets topped US$60 billion in 2007 and is only expected to grow.

There are three basic kinds of emissions trading programs: cap and trade, baseline and credit and offset.

Under cap and trade, a regulator sets an uppermost limit or cap on emissions, equal to the total number of tons of pollutant allowed to emit each year. Allowances, equal to the permitted emissions, are then distributed. Participants keep track of their actual emissions and the end of the compliance period, those who are over their limit can buy credits from those who are below.