Potential and Limits of Carbon Market Integration

INTRODUCTION

The purpose of this term paper is to determine the potential and limits of the carbon market integration . In this paper we will discuss shortly about the political economy of the carbon trading systems and top-down and bottom-up integration scenarios towards a global carbon market.

Cap-and-trade systems establish property rights to emissions, allocate them to actors that are included in the system, create a market in which those actors can trade these property rights and, finally, institute penalties for non-compliance. The purpose of these regimes is to either reduce energy demand or to change the way energy is produced
(switching into non-carbon alternatives). Proponents of emissions trading suggest that such a market-based approach to emissions reduction constitutes the most effective and efficient mechanism to achieve ambitious mitigation goals. It should be noted in this

context ,however, that the achievement of both objectives on a large scale must work

through a process of technological change and innovation.

One of the key targets of emissions trading schemes is the power sector. This makes

sense. The power sector, in most countries firmly wedded to a fossil fuel-based energy

paradigm, is responsible for close to 60 percent of worldwide emissions of CO2. The

goal of putting a price on emissions is to incentivize power producers to switch into low-

carbon (or carbon-neutral) generation capacity. The challenge here is enormous. The

International Energy Agency (IEA) estimates that between 2007 and 2030, more

than US$26 trillion in new energy sector investment is necessary in order to keep up

with world demand. (1) These investments, a significant portion of which will have to be realized in major emerging economies such as China and India, will determine

emissions trajectories for decades to come. Under a business-as-usual scenario (i.e.

without putting a price on carbon,