Name: Prateek Tripathi Department: Department Of Business Administration Teacher: Dr.

Ajai Prakash Subject: Environment Management Year: 2012-14 Course: MBA I (Section-A)

Table Of Contents
1. Acknowledgement 2. Introduction.. 2.1. Mandatory Carbon Trading.... 2.2. Voluntary Carbon Trading. 3. Carbon Offsets. 3.1. The Theory Behind Carbon Offsets... 3.2. Why Do People Buy Carbon Offsets. 3.3. Emerging Standards And How To Buy Carbon Offsets 4. Why Are Carbon Trading Markets Developing... 5. How The Chicago Climate Exchange Works.. 5.1. Membership of Chicago Climate Exchange.. 5.2. Trading In The Chicago Climate Exchange.. 5.3. Chicago Climate Exchange Projects. 6. How Carbon Footprints Work. 6.1. Calculating Carbon Footprints.. 6.2. Reducing Carbon Footprints. 7. Carbon Tax.. 7.1. The Benefits Of Carbon Tax. 7.2. The Logistics Of Carbon Tax.... 8. References...

I am thankful to my learned teacher Dr. Ajai Prakash (Department of Business Administration). This Environment Management project entitled Carbon Trading has been possible through the efforts of our respected teacher. I am thankful to sir for giving essential and useful guidance from time to time in understanding the concepts.

Prateek Tripathi MBA I (Section-A)

INTRODUCTION
The dramatic imagery of global warming frightens people. Melting glaciers, freak storms and stranded polar bears -- the mascots of climate change -- show how quickly and drastically greenhouse gas emissions (GHG) are changing our planet. Such graphic examples, combined with the rising price of energy, drive people to want to reduce consumption and lower their personal shares of global emissions. But behind the emotional front of climate change lies a developing framework of economic solutions to the problem. Two major market-based options exist, and politicians around the world have largely settled on carbon trading over its rival, carbon tax, as the chosen method to regulate GHG emissions.

Renewing the Grid Image Gallery

Carbon trading, sometimes called emissions trading, is a market-based tool to limit GHG. The carbon market trades emissions under cap-and-trade schemes or with credits that pay for or offset GHG reductions. Cap-and-trade schemes are the most popular way to regulate carbon dioxide (CO2) and other emissions. The scheme's governing body begins by setting a cap on allowable emissions. It then distributes or auctions off emissions allowances that total the cap. Member firms that do not have enough allowances to cover their emissions must either make reductions or buy another firm's spare credits. Members with extra allowances can sell them or bank them for future use. Cap-and-trade schemes can be either mandatory or voluntary. A successful cap-and-trade scheme relies on a strict but feasible cap that decreases emissions over time. If the cap is set too high, an excess of emissions will enter the atmosphere and the scheme will have no effect on the environment. A high cap can also drive down the value of allowances, causing losses in firms that have reduced their emissions and banked credits. If the cap is set too low, allowances are scarce and overpriced. Some cap and trade schemes have safety valves to keep the value of allowances within a certain range. If the price of allowances gets too high, the scheme's governing body will release additional credits to stabilize the price. The price of allowances is usually a function of supply and demand. Credits are similar to carbon offsets except that they're often used in conjunction with cap-and-trade schemes. Firms that wish to reduce below target may fund preapproved emissions reduction projects at other sites or even in other countries.

Mandatory Carbon Trading

The Kyoto Protocol, an international treaty on climate change that came into force in 2005, dominates the mandatory carbon market. It serves as both a model and a warning for every emerging carbon program. In the early 1990s, nearly every member state of the United Nations resolved to confront global warming and manage its consequences. Although the resulting United Nations Framework Convention on Climate Change (UNFCCC) international treaty recognized a unified resolve to slow global warming, it set only loose goals for lowering emissions. In 1997, the Kyoto amendment strengthened the convention. Under the Protocol, members of the convention with industrialized or transitional economies (Annex I members) receive specific reduction targets. Member states with developing economies are not expected to meet emissions targets - an exception that has caused controversy because some nations like China and India produce enormous levels of GHG. The Protocol commits Annex I members to cut their emissions 5 percent below 1990 levels between 2008 and 2012. But because the Protocol does not manage the way in which members reduce their emissions, several mechanisms have arisen. The largest and most famous is the European Trading Scheme (ETS), which is still in its second trading phase and will end in December 2012. The ETS is mandatory across the European Union (EU). The multi-sector cap and trade scheme includes about 12,000 factories and utilities in 25 countries. Each member state sets its own emissions cap, or national allocation plan, based on its Kyoto and national targets. Countries then distribute allowances totaling the cap to individual firms. Even though countries distribute their own allowances, the allowances themselves can be traded across the EU. Independent third parties verify all emissions and reductions. There has been, however, some question as to whether the ETS has actually helped reduce emissions. Some people even call it a "permit to pollute" because the ETS allows member states to distribute allowances free of charge. The ETS also excludes transport, homes and public sector emissions from regulation. And as with all cap-and-trade schemes, governments can essentially exempt influential industries by flooding them with free allowances. The ETS allows its members to earn credits by funding projects through two other Kyoto mechanisms: the Clean Development Mechanism (CDM) and Joint Implementation (JI). CDM allows Annex I industrialized countries to pay for emissions reduction projects in poorer countries that do not have emissions targets. By funding projects, Annex I countries earn certified emissions reduction (CER) credits to add to their own allowances. JI allows Annex I parties to fund projects in other Annex I countries. The Kyoto Protocol expires in end 2012. Lawmakers around the world are rushing to analyze its achievements and shortcomings and negotiate a successor. The United States, Kyoto's most famous holdout, lacks any national mandatory carbon legislation but, ironically, has a booming voluntary carbon market.

Voluntary Carbon Trading

The Clinton administration helped develop the Kyoto Protocol. But when it came time to ratify the treaty in 2001, the United States chose not to. The government believed that Kyoto was fatally flawed and could cause economic havoc. Not all Americans agreed, however. In 2005, 132 of the nation's mayors pledged to meet Kyoto-like emissions targets. Many cited the economic consequences of dwindling water supplies and rising oceans. Some cities and companies took action even earlier. In 2003, Dr. Richard Sandor founded the Chicago Climate Exchange (CCX), a voluntary carbon market. Members of the CCX willingly join the pooled commodity but commit to legally binding reductions. Since the CCX is voluntary, all sorts of organizations have joined: companies, universities and even cities. Michigan State, Ford, DuPont and the cities of Chicago and Portland, Ore., are among its members. Like other cap-and-trade programs, the CCX sets a limit on total allowable emissions and issues allowances that equal the cap. Member firms then trade the allowances -- carbon financial instruments (CFIs) -- amongst themselves. Each CFI equals 100 metric tons of CO2 equivalents. Members that meet their targets can sell or bank their allowances. Firms can also generate CFIs, specifically exchange offsets, by funding approved GHG reduction projects outside of the pool. In 2006, CCX traded a total of 10.2 million tons of CO2. Because CCX is owned by an independent, publicly traded company, it's free from the federal regulations that can bog down mandatory carbon trading schemes. Like Kyoto or the ETS, the CCX has two phases of implementation. In the first phase, which ran from 2003 to 2006, members committed to reducing emissions by only 1 percent per year below their baselines. In the second phase, which is running from 2007 to 2012, members are working on reduce emissions 6 percent below their baselines. Although the CCX's high cap has drawn criticism, the pooled commodity's true benefit may end up being the market-based practice it provides its members. Cities across the country have already created municipal carbon schemes. Some states are fashioning mandatory carbon markets for utilities. The United States is very likely headed toward some form of national carbon legislation. When such a time comes, members of the CCX will have the valuable advantage of experience. Carbon trading and other market-based schemes add a needed dose of economic practicality to the emotionally charged issue of global warming. They help change the way we think about emissions, energy efficiency and the environment.

CARBON OFFSETS
With bands like Coldplay and Pink Floyd releasing carbon-neutral albums, airlines like Silverjet claiming carbon neutrality and a growing troop of celebrities trumpeting their lowcarbon lifestyles, a person might wonder how they all do it. Carbon neutrality begins with reduction. It's a concentrated effort to produce less waste and use more renewable energy. After reduction has reached its limit, or its comfortable threshold, carbon offsets can make up for the rest. Carbon offsets are a form of trade. When you buy an offset, you fund projects that reduce greenhouse gas (GHG) emissions. The projects might restore forests, update power plants and factories or increase the energy efficiency of buildings and transportation. Carbon offsets let you pay to reduce the global GHG total instead of making radical or impossible reductions of your own. GHG emissions mix quickly with the air and, unlike other pollutants, spread around the entire planet. Because of this, it doesn't really matter where GHG reductions take place if fewer emissions enter the atmosphere. Carbon offsets are voluntary. People and businesses buy them to reduce their carbon footprints or build up their green image. Carbon offsets can counteract specific activities like air travel and driving or events like weddings and conferences. Some environmentalists doubt the validity and effectiveness of carbon offsets. Because the commercial carbon trade is an emerging market, it's difficult to judge the quality of offset providers and projects. Trees don't always live a full life, sequestration projects (for the longterm containment of emissions) sometimes fail and offset companies occasionally deceive their customers. And voluntary offsets can easily become an excuse to overindulge and not feel guilty about it.

Carbon offsets do, however, raise awareness about lowering the GHG world total.

The Theory Behind Carbon Offsets

GHG emissions are a global problem. Carbon offsets operate on the idea that any reduction in any area is worthwhile. Yet it's much cheaper to reduce or absorb emissions in developing or transitional regions of the world. Currencies might be weaker or supplies less expensive. Logistically, it is easier to make changes in an area that does not already have a developed infrastructure. Offsets, however, are somewhat of a luxury. We are, after all, paying for non-emissions something that doesn't even exist. Because of this, most people who purchase offsets live in developed nations where drastically lowering domestic emissions is difficult and expensive. A business or household might find buying offsets more economical than retrofitting a building or eliminating auto emissions. With the planet as a whole producing about 25 billion tons of CO2 per year, it doesn't really matter if a reforestation project in Ecuador gets its funding from an Ecuadorian banker or an American factory. Carbon offsets fund projects like forest planting, conversion to renewable energy sources or GHG collection and sequestration. Offsets support both large-scale and community projects. A single company might restore a forest in Uganda and support the construction of efficient stoves in Honduran villages.

MONEY FOR NOTHING

Greenhouse gases trap heat in the Earth's atmosphere. Cars, planes, power plants and factories all emit GHG. The Kyoto Protocol, an international GHG agreement, defines six troubling types of emissions:

Carbon dioxide (CO2): When fossil fuels, waste and plant matter burn, they emit CO2, the most common GHG emission. Methane (CH4): Landfills, livestock, agricultural activities and the production of coal, natural gas and oil all generate CH4, an emission far more powerful than CO2. Nitrous oxide (N2O): Sewage treatment and the combustion of fossil fuels both produce N2O. However, fertilizer and agricultural soil management release the majority of this potent emission. Sulphur hexafluoride (SF6): The electric power industry uses this man-made compound for insulation and current interruption. Hydro fluorocarbons (HFCs): Solvents, refrigerants, firefighting agents and propellants for aerosols use HFCs as a replacement for ozone-depleting chlorofluorocarbons (CFCs). Per fluorocarbons (PFCs): There are relatively low amounts of PFCs in the atmosphere, but they're hard to get rid of. The estimated atmospheric life of this solvent and component of aluminum production ranges from 10,000 to 50,000 years!

Why do People Buy Carbon Offsets?

As people and businesses become more aware of their own contributions to global warming, some turn to carbon offsets as a way to go neutral. Offset companies first estimate a customer's personal carbon output. Their Web sites include carbon calculators that determine the total GHG produced by a year's worth of electricity or driving, an event or even a round-trip flight. Offset companies then charge an amount based on their own GHG price per ton. The money funds programs that offset an equal amount of emissions. Some offset companies allow customers to choose their projects; others do not. Aside from the physical benefits of offset projects, voluntary commercial offsets make customers look beyond the limits of their own households or businesses. Before buying offsets, people presumably first reduce their own emissions. They may limit travel, choose energyefficient appliances or convert to renewable energy. After they cannot reduce any more, or if they find it uneconomical to do so, carbon offsets help make up for the rest. Some purchasers, however, make no attempt to reduce their emissions before buying carbon offsets. Critics claim that offsets give people who are unwilling to change their lifestyle an easy, monetary way out of taking real responsibility. Offsets do not provide carbon atonement for a trip by private jet or the construction of a sprawling mansion. When the average American car produces more CO2 in a year than the total annual production of an average global citizen, it's clear that monetary investments cannot replace actual GHG reductions in developed nations. Carbon offsets have also become the mode in corporate responsibility. Companies with green reputations attract a public increasingly concerned with the environment and global warming. Because carbon offsets are voluntary, generous purchases can help strengthen a company's environmental image. Some companies make real efforts to modify their operations, create fewer GHG emissions and offset the rest. But businesses can also conceal lax environmental standards with highly promoted carbon offsets. Environmentalists call this type of deception green washing.

IS IT EASY BEING GREEN?

Most individuals and companies that buy carbon offsets like to talk about it. Seeing smoothly run carbon-neutral households or businesses often encourages other people to fund projects. So what better way to spread the word than to carbon-neutralize international megaevents? For the 2006 World Cup soccer tournament in Germany, FIFA employed renewable energy sources, collected rainwater, encouraged bicycling and bought offsets that funded energy projects. The 2006 Olympics in Torino, Italy, and Super Bowl XLI also attempted neutrality through offsets. Concerts, like Live Earth and the Rolling Stones' United Kingdom "Licks" tour, have also gone green. The music, film and interactive festival SXSW plans to buy offsets for its 2008 event. But while enormous events and concerts can go carbon-neutral, there's little they can do about the thousands of fans, athletes and performers flying in and out from around the globe.

Emerging Standards and How to Buy Offsets

Carbon offsets vary significantly in quality because they are intangible -- there is no product. It's easy for carbon cowboys -- offset businesses that are not credible -- to scam consumers with bad or nonexistent projects. But with interest in offsets growing, environmental and business organizations are trying to establish reliable standards for rating offset companies and projects. Several standards have recently emerged: the Voluntary Carbon Standard (VCS), the Gold Standard and the Climate, Community and Biodiversity Standard. While they focus on different types of offsets, all of the standards share the goal of bringing order to the booming carbon-offset business. The nonprofit organization Clean Air-Cool Planet commissioned an evaluation of retail offset companies in December 2006. The report proposed standards that consumers should consider before they buy offsets. A quality offset funds only projects that would not have occurred without the extra support. This is called additionality because all environmental benefits should be in addition to what would have happened anyway. A good offset must also have an accurate baseline, or estimate, of how much GHG a particular project sequesters or avoids. A baseline set too high makes the project's benefits look more impressive than they really are. The GHG reductions should be accurately quantified, and the projects should have permanence -- a low potential of releasing CO2 back into the atmosphere in the near future. Offsets also need clear, registered ownership so the same offset cannot be resold again and again. When a company warns consumers of the risks associated with projects, it is acting with transparency. Offset companies that fund forestry projects should be especially up-front about the projects' permanence. It takes years for trees to reach their full growing potential, and companies do not always disclose the likelihood of disease or fire. Coldplay bought 10,000 mango trees in India to offset an album, only to see many of them die several years later. For their next album, Coldplay decided to protect already established wooded areas in Mexico and Ecuador. Despite questions of legitimacy, forestry offsets are popular because they represent real, visible improvements. People feel more comfortable buying 50 trees than sequestering a ton of methane. The market for retail carbon offsets continues to grow, partly because of the absence or laxity of regulated carbon trading programs. There is no mandatory GHG market in the United States, but much of the developed world supports the Kyoto Protocol, an addition to the United Nations Framework Convention on Climate Change. The United States, despite being a member of the Convention, chose not to ratify the Protocol in 2001. Carbon offsets encourage individuals and businesses to take responsibility for their part in global climate change. Offsets don't excuse excess, but if viewed as aid for people and the environment, they can be beneficial. Perhaps more importantly, the popularity of voluntary offsets could help promote a carbon market or a carbon tax backed by public policy.

WHY ARE CARBON TRADING MARKETS DEVELOPING?

There is unequivocal evidence that the concentration of CO2 is increasing in the atmosphere. This increase is being driven by the burning of fossil fuels and the conversion of forested to non-forested land uses. CO2 is a greenhouse gas, which means that CO2 molecules literally trap heat that is trying to leave the earths atmosphere, and in so doing has the potential to increase the temperature of the earth. This potential for increasing temperatures is typically referred to as global warming and many negative feedbacks such as increased hurricane or drought intensities are often subscribed to this increased warming.

Decreasing the rate of increase in the concentration of atmospheric CO2 can be achieved through reducing use of fossil fuels as well as the rate of forest land conversion. More pro-active options for actually removing CO2 currently in the atmosphere are also available and typically involve increasing the amount of forest land or changing the way forests and soils are managed (i.e., limiting tree harvests or soil tillage). Some engineering approaches such as injecting CO2 deep into the earth or into the ocean have also been proposed.

In an effort to limit the rate of CO2 increase in the atmosphere carbon trading markets are developing to incentivize individuals to contribute to CO2 sequestration. As an outgrowth, a diversity of carbon registries and carbon trading protocols are rapidly developing in the USA. The general objective for these registries is to provide guidelines to interested parties about quantifying their carbon emitting or sequestering activities with the intent of fostering carbon trading.

HOW THE CHICAGO CLIMATE EXCHANGE WORKS

People have been using oil for more than 5,000 to 6,000 years, and today, fossil fuels provide 85 percent of the energy in America alone. Generating energy from fossil fuels has a downside -- greenhouse-gas emissions byproducts. Greenhouse gases (GHGs) are considered to be partly responsible for global warming, and international efforts are under way to reduce the emission of six offenders: carbon dioxide, methane, nitrous oxide, hydro fluorocarbons, per fluorocarbons and sulphur hexafluoride. Under the Kyoto Protocol treaty, a legally binding agreement drafted in 1997 and enacted in 2005, 37 industrialized countries, as well as the European Union pledged to reduce total emissions by an average of 5 percent below their 1990 levels between 2008 and 2012. How are counties reaching these goals? They have two choices. Invest in ways to reduce pollution levels or invest in others' capacity to cut their pollution, a cap and trade system that puts a price on emissions. Cap and trade works basically like this: Countries (as well as companies or individuals) are given an allowance of how much GHG they may emit, known as the cap. Let's say Country A easily reduced its emissions and emitted 10 percent fewer GHGs than its cap permitted. Country B, though, didn't meet its cap. Country A can sell the unused 10 percent of its allowance to Country B and help Country B offset its emission excess -- the trade. In 2000, economist Dr. Richard Sandor began studying whether a cap and trade system could be applied to U.S. companies and the way they reduce their GHG emissions. He believed the country was ready for a private carbon trading market, even if it didn't back an international treaty like Kyoto. Carbon trading is like selling company shares on the stock market except it's not shares of a company, its shares of pollution. As it turns out, his brainchild was a hot idea. Sandor founded the Chicago Climate Exchange (CCX), and in 2003, 13 charter members began trading GHG allowances for the six named GHGs. Today, the CCX has roughly 300 multinational members. The CCX was the first in the world when it launched, but affiliated exchanges have since opened around the world, including the European Climate Exchange (ECX), Chicago Climate Futures Exchange (CCFE), Montral Climate Exchange (MCeX) and Tianjin Climate Exchange. The CCX is still the only carbon trading market in America.

Membership of the Chicago Climate Exchange

The member base in the CCX is broken down into categories:

Members Associate members Participant members (offset providers and aggregators and liquidity providers) Exchange participants Members are those who directly generate and emit greenhouse gases through activities such as energy production, manufacturing and travel. Associate members don't generate their own direct GHG emissions but instead agree to offset 100 percent of indirect emissions, including electricity (and other energy) use and business travel. Offset providers and aggregators and liquidity providers are participant members. Offset providers own projects that offset GHG emissions by storing, eliminating or reducing those emissions. Qualifying projects generate exchange offsets that can be traded (we'll find out more about these later). Offset aggregators administratively manage offset projects for the providers. Liquidity providers and exchange participants are a little bit different. Liquidity providers aren't in it to comply with emission reduction, they're market makers -- professional traders, hedge-fund groups and proprietary-trading groups -- companies or individuals who want to trade on the CCX market. Exchange participants are companies or individuals without a GHG emissions reduction commitment of their own, such as the U.S. House of Representatives and the Clean Air Conservancy. Exchange participants buy carbon financial instruments (the CCX's measure of emissions) with the sole purpose of retiring the contracts. With so many types of members, the CCX is made up of a diverse set of players, from Amtrak and Ford Motor Company, to waste-management facilities and even a brewing company. About 25 percent of members are from U.S. power utilities, 17 percent are part of the Dow Jones Industrials and 11 percent represent Fortune 100 companies. It's not just industry, though. Eight universities, eight U.S. cities, three counties and two states have also joined the CCX. Joining is voluntary and self-regulating and comes with attractive benefits. Many U.S. companies see government emissions regulations in the future and want to get on the path to compliance before legislation is enacted. Many also need to comply with Kyoto Protocol regulations if they do business in countries committed to that treaty. Others see it as a good way to make extra money. If making the minimum reduction is easy for a company, it can profit from selling credits on the exchange. It's not all about profit and regulation, though. Reducing emissions is good for the planet and good public relations. To join the CCX cap and trade system, each GHG-emitting member pays an entry fee and is given a yearly emission allowance based on their emission baseline and the CCX emission

reduction schedule. This is their exchange allowance. Annual membership costs and compliance are also determined by the emission baseline and audits conducted by third-party verifiers. Once committed, the contract is legally binding. The emission reduction schedule is two-phased. A member's emission baseline is calculated from average of annual emissions, worldwide, during a specific period of time. For Phase I (the first four years of the CCX -- 2003 to 2006) baselines were determined by 1998 through 2001 annual emission levels; during this phase, members reduced their carbon dioxide (or other GHG) emissions by a minimum of 1 percent annually. Phase I members committed to reducing total emissions to 4 percent below their established baseline. Phase II extended of the reduction schedule and covered the subsequent years up to 2010. For members who participated in Phase I, emission reduction requirements rose by 2 percent, to a total of 6 percent. The baseline for new members joining Phase II is established by total emissions during the year 2000, and the reduction target is a minimum of 6 percent below that baseline.

Trading in the Chicago Climate Exchange

Greenhouse-gas emissions are released into the atmosphere, so you may be wondering how something in the air can be bought and sold. What's actually traded on the CCX market is something called the carbon financial instrument (CFI). A CCX member who has hit or surpassed its target emission reduction goals has an emission credit. These credits, the difference between the actual GHG emission levels and the allowed GHG emission levels, are represented by the CFIs. One CFI contract is made up of exchange allowances and exchange offsets and represents 100 metric tons (110 tons) of carbon dioxide equivalent (CO2e), the international measure of greenhouse-gas emissions. CFI contracts can be saved or sold to members who exceeded their reduction goal to help with their compliance. But sold at what cost? That's the beauty of the system -- the market demand sets the price of CFI contracts. The more members who want to buy credits, the more in demand they are, which causes prices to rise accordingly. Trading isn't conducted through brokers, but is instead done anonymously (to other users) on the CCX electronic trading platform, an Internet-based trading floor that is linked with the CCX registry. This comprehensive system is available to the CCX member base and offers administrative and reporting tools, as well as a tracking system for members to manage their emission inventory (the gases they're emitting), portfolio of CFI holdings, bids (orders) and statements, emission allowances and offsets. CFIs are issued by the year in which the emission reduction was realized: 2003 Vintage CFI, 2005 Vintage CFI, etc. A CFI can be used in the same calendar year as its vintage, or a member can save it for use in upcoming years.

Transactions made in the CCX electronic trading platform are done based on live market quotes posted by members and may be settled one of two ways -- trades that are exchange cleared or trades that are bilaterally cleared. Exchange cleared trades are those cleared and settled through the CCX; the cash settlements in bilaterally cleared trades are handled by the members themselves. All trade settlements are made in U.S. dollar amounts. All members with exchange allowances and exchange offsets are monitored continuously and report their emissions each year via procedures set up by the CCX and by the World Resources Institute/World Business Council for Sustainable Development initiative. Another layer of monitoring happens through the Financial Industry Regulatory Authority (FINRA), a nongovernmental regulator for all securities firms doing business in the United States. In addition to the CCX, FINRA works with NASDAQ, the American Stock Exchange and the International Securities Exchange. FINRA also verifies offset projects proposed and registered by members and offset providers and aggregators.

Chicago Climate Exchange Projects

Members with emission reduction goals aren't the only ones trading on the CCX, nor are exchange allowances the only type of trades. All members also have the opportunity to buy exchange offsets from offset providers and offset aggregators, as well as members with a qualifying project proposal. Offset providers could be farmers, waste management operators, renewable energy suppliers or any other company or individual proposing a GHG emissionreducing project. Offset aggregators manage multiple projects, all emitting less than 10,000 metric tons (110 tons) of CO2e annually. Offset projects are evaluated and approved by CCX staff based on standardized CCX rules, and CFI contracts are issued once the project's viability has been reviewed by a third-party independent verifier. Project types include methane capture and combustion for agricultural, coal mine and landfill methane; agricultural soil carbon management, improved rangeland soil management; forestry; renewable energy (wind and solar power) and ozone depleting substance destruction. Additional project types that are reviewed and approved on a case-by-case basis include energy-efficiency and fuel-switching projects, as well as clean development mechanism (CDM)-eligible projects that allow industrialized countries to invest in emissionreducing projects in developing countries rather than in their own. Just as members voluntarily agree to join the exchange and reduce their GHG output, eligible offset projects must be voluntary (not required by law). A forestry GHG offset project may, for example, include maintaining or increasing a forest area through reforestation. To kick things off, the project initiator would submit a proposal to the CCX committee on offsets for review and approval. Upon that approval, the project owner would then have the project independently verified by a CCX-endorsed third party.

Projects, just like allowances, are also subject to third-party verification to determine three things:

That the project is eligible That the equipment generating the GHG displacement credit is owned by the offset provider (giving the provider the right to propose the project) That the project is performing effectively. The CCX provides a list of third-party verifiers to its members. Once verified, reports are reviewed for accuracy by FINRA. Only then may they be set up as tradable CFI contracts in the CCX registry. There's no limit to the number of projects an offset provider or aggregator can register and receive CFI contracts for trading on the CCX electronic trading platform. To mitigate duplicating sold credits, each project is assigned a unique identification number in the CCX system. According to the CCX, offsets aren't yet as popular a trade as are emission allowance credits: one offset is used for every 50 times a buyer needs a credit to comply with its emission schedule. Though government regulations have yet to be defined, the global carbon trading market is expanding rapidly each year and is predicted to reach $200 billion by 2010.

HOW CARBON FOOTPRINTS WORK

Footprints offer clues about where we came from and where we're headed. Their impressions tell us something about the animals that leave them. But while actual footprints offer details on size, weight and speed, carbon footprints measure how much carbon dioxide (CO2) we produce just by going about our daily lives. A drive to work, a flip of a light switch and a flight out of town all rely on the combustion of fossil fuels like oil, coal and gas. When fossil fuels burn, they emit greenhouse gases like CO2 that contribute to global warming. Ninety-eight percent of atmospheric CO2 comes from the combustion of fossil fuels. People concerned with the environment and global warming usually try to reduce their carbon output by increasing their home's energy efficiency and driving less. Some start by calculating their carbon footprint to set a benchmark -- like a weigh-in before a diet. A carbon footprint is simply a figure -- usually a monthly or annual total of CO2 output measured in tons. Web sites with carbon calculators turn easy-to-supply information like annual mileage and monthly power usage into a measurable tonnage of carbon. Most people try to reduce their carbon footprint, but others aim to erase it completely. When people attempt carbon neutrality, they cut their emissions as much as possible and offset the rest. Carbon offsets let you pay to reduce the global greenhouse gas total instead of making radical reductions of your own. When you buy an offset, you fund projects that reduce emissions by restoring forests, updating power plants and factories or increasing the energy efficiency of buildings and transportation. Some companies have started to include footprints on their labeling. Carbon labels appeal to consumers who understand and monitor their own carbon footprints and want to support products that do the same. The labels estimate the emissions created by producing, packaging, transporting and disposing of a product. The concept is similar to life cycle analyses, the more intricate forerunner of carbon footprints. Life cycle analyses or assessments evaluate all of the potential environmental impacts that a product can have during its existence -- they're a more focused version of a carbon footprint. But life cycle analyses require teams of researchers who plot and compile data from every aspect of production, transportation and disposal. Personal carbon footprints are less precise but still give a quick, general idea of CO2 output. Best of all, they take about five minutes to calculate.

Calculating Carbon Footprints

To remain as accessible as possible, most carbon calculators ask very simple questions about consumption. They accept estimates of annual electricity usage or mileage instead of exact and difficult-to-provide totals. Carbon calculators usually start by asking for your location. Regardless of your personal consumption, your carbon footprint is partly determined by the state you live in. Some states rely more on dirtier sources of power like coal; others use larger percentages of renewable sources that produce less CO2. Most calculators also ask for the size of your household. The calculator can then differentiate between your personal carbon footprint and that of the house as a whole. To determine the amount of CO2 produced by home electricity, the calculator divides the estimated or exact usage by the price of power in the area. The calculator then multiplies this number by the state's emissions factor, a figure that relates to the type of energy the state uses. Calculators also factor in natural gas, heating oil and propane use. Most calculators account for the lower emissions of green power subscribers. Some power companies allow customers the option to pay a bit more on their monthly bill to receive a certain percentage of power from renewable sources. This reduces the state's production of fossil-fueled power and helps develop a green market. Carbon footprints also include the CO2 produced by transportation. Most people don't know their annual fuel usage, so calculators usually ask for an estimated annual mileage and the car's make, model and year. The calculator divides mileage by the car's fuel efficiency to determine annual fuel usage. This figure is then multiplied by the emissions factor of gasoline or diesel fuel, which converts it to pounds of CO2. For air travel, some carbon calculators ask for an annual estimate of mileage. Other calculators account for increased emissions during takeoff and ask for the number of short, medium, long or extended flights. After compiling all the figures, the calculator produces a total CO2 output in tons - a carbon footprint. Some calculators even put footprints in context by comparing them with the national or global averages. If you have the data ready, the whole process takes the calculator about 30 seconds.

ECOLOGICAL FOOTPRINTS
A carbon footprint is only one component of the broader ecological footprint. An ecological footprint compares the population's consumption of resources and land with the planet's ability to regenerate. The Earth's ecological footprint is currently 23 percent over capacity. It takes about one year and two months to regenerate what we consume in a year.

ENERGY STAR
Because carbon calculators ask for only rough estimates, it's fairly easy for investigators to approximate the footprints of celebrities and politicians. Analysts hoping to uncover hypocrisy target high-profile figures, especially those who promote environmentalism. Although Live Earth performer Madonna and other celebrities like Tom Cruise and David Beckham have been accused of flying frequently, sometimes with large entourages, former Vice President Al Gore has drawn the harshest accusations. His popular movie "An Inconvenient Truth" raised awareness of carbon reductions but also stirred an independent firm to look into his utility records. The Gores' spokesperson did not deny the $30,000 per year in utility bills but emphasized that the couple subscribes to green power, plans on installing solar panels and purchases offsets.

Reducing Carbon Footprints

Carbon footprints help people keep track of changes. Because footprints quantify an amount of carbon that increases or decreases based on energy use, they let people know that a new hybrid car or home insulation really does help lower emissions. Transportation accounts for 33 percent of CO2 emissions in the United States, so many people try to lower their mileage. Some walk or bike whenever possible; others carpool, take public transport or invest in fuel-efficient cars. Home energy use accounts for 21 percent of U.S. CO2 emissions, so it helps to have an efficient home. Setting the thermostat at a moderate temperature and installing good insulation and double-paned windows lowers energy costs while keeping your house comfortable. Compact fluorescent lamps (CFLs), energy-efficient appliances and green power sources also help lower consumption. Of course, individual efforts to reduce emissions can go only so far. Cutting CO2 and other greenhouse gases down to safer levels requires significant government regulation. Lessening carbon footprints does, however, let people see where they are and how they can change. Those who think government regulation moves too slowly or who want to accept personal responsibility for their emissions can track their own reductions and alter their individual habits. The public's recognition of global warming has driven lawmakers around the world to negotiate greenhouse-gas reductions. We always hear a few legislators suggest a tax on carbon or sometimes more broadly, a tax on the emissions of fossil fuels. But before the word "tax" sets off alarm bells, consider the effect of combusted fossil fuels on the environment. They cause ground-level ozone, acid rain, global climate change and a myriad of other problems. Carbon tax is one of two major market-based options to lower emissions, the other being cap-and-trade schemes. While cap-and-trade seems to have won over most politicians, many economists and consumers prefer carbon tax for its simplicity and impartiality.

CARBON TAX
Carbon tax is a form of pollution tax. It levies a fee on the production, distribution or use of fossil fuels based on how much carbon their combustion emits. The government sets a price per ton on carbon, then translates it into a tax on electricity, natural gas or oil. Because the tax makes using dirty fuels more expensive, it encourages utilities, businesses and individuals to reduce consumption and increase energy efficiency. Carbon tax also makes alternative energy more cost-competitive with cheaper, polluting fuels like coal, natural gas and oil. Carbon tax is based on the economic principle of negative externalities. Externalities are costs or benefits generated by the production of goods and services. Negative externalities are costs that are not paid for. When utilities, businesses or homeowners consume fossil fuels, they create pollution that has a societal cost; everyone suffers from the effects of pollution. Proponents of a carbon tax believe that the price of fossil fuels should account for these societal costs. More simply put - if you're polluting to everyone else's detriment, you should have to pay for it.

The Benefits of Carbon Tax

The primary purpose of carbon tax is to lower greenhouse-gas emissions. The tax charges a fee on fossil fuels based on how much carbon they emit when burned (more on that later). So in order to reduce the fees, utilities, business and individuals attempt to use less energy derived from fossil fuels. An individual might switch to public transportation and replace incandescent bulbs with compact fluorescent lamps (CFLs). A business might increase energy efficiency by installing new appliances or updating heating and cooling systems. A utility company might use wet scrubbers, low NOx-burners or gasification to reduce their emissions. And since carbon tax sets a definite price on carbon, there is a guaranteed return on expensive efficiency investments. Carbon tax also encourages alternative energy by making it cost-competitive with cheaper fuels. A tax on a plentiful and inexpensive fuel like coal raises its per British Thermal Unit (Btu) price to one comparable with cleaner forms of power. A Btu is a standard measure of heat energy used in industry. One Btu is the energy necessary to raise the temperature of one pound of water by one degree Fahrenheit. And we should not forget about all the money raised by the tax. It can help subsidize environmental programs or be issued as a rebate. Many fans of carbon tax believe in progressive tax-shifting. This would mean that some of the tax burden would shift away from federal income tax and state sales tax. Economists like carbon tax for its predictability. The price of carbon under cap-and-trade schemes can fluctuate with weather and changing economic conditions. This is because cap-andtrade schemes set a definite limit on emissions, not a definite price on carbon. Carbon tax is

stable. Businesses and utilities would know the price of carbon and where it was headed. They could then invest in alternative energy and increased energy efficiency based on that knowledge. It's also easier for people to understand carbon tax.

The Logistics of Carbon Tax

The carbon content of oil, coal and gas varies. Proponents of a carbon tax want to encourage the use of efficient fuels. If all fuel types were taxed equally by weight or volume, there would be no incentive to use cleaner sources like natural gas over dirtier, cheaper ones like coal. To fairly reflect carbon content, the tax has to be based on Btu heat units -- something standardized and quantifiable - instead of unrelated units like weight or volume. Each fuel variety also has its own carbon content. Bituminous coal, for instance, contains considerably more carbon than lignite coal. Residual fuel oil contains more carbon than gasoline. Every fuel variety needs to have its own rate based on its Btu heat content. Carbon tax can be levied at different points of production and consumption. Some taxes target the top of the supply chain - the transaction between producers like coal mines and oil wellheads and suppliers like coal shippers and oil refiners. Some taxes affect distributors - the oil companies and utilities. And other taxes charge consumers directly through electric bills. Different carbon taxes, both real and theoretical, support varying points of implementation. The only carbon tax in the United States, a municipal tax in Boulder, Colo., taxes the consumers - homeowners and businesses. People in Boulder pay a fee based on the number of kilowatt hours of electricity they use. Officials say the tax amounts to an annual addition of about $16 for homeowners' electric bills and $46 for business owners. Like Boulder, Sweden also taxes the consumption end. The national carbon tax charges homeowners a full rate and halves it for industry. Utilities are not charged at all. Since the majority of Swedish power consumption goes to heat, and because the tax exempts renewable energy sources like those derived from plants, the bio-fuel industry has blossomed since 1991. Quebec has started a tax on petroleum, natural gas and coal from October 2007. Instead of taxing consumers, Quebec is taxing the middlemen -- energy and oil companies. Even though the tax is toward the top end, companies passed on some of the cost to consumers by charging more for energy. It's easier to tax consumption than production. Consumers are more willing to pay the extra $16 a year for a carbon tax. Producers are usually not. Taxes on production can also be economically disruptive and make domestic energy more expensive than foreign imports. That's why existing carbon taxes target consumers, or, in the case of Quebec, energy and oil companies. Carbon tax has a patchy history in the United States and around the world. It's widely accepted

only in Northern Europe - Denmark, Finland, the Netherlands, Norway, Poland and Sweden all tax carbon in some form.

THE PRICE IS RIGHT

Because the carbon content of fuel varies, certain fuels should be taxed at a higher rate. The Carbon Tax Center, a group that supports the adoption of a national carbon tax in the United States, determined the following theoretical rates. They assumed a tax of $50 per ton of carbon (not CO2) emitted, determined the heat content of several major fuels, and created a hypothetical price per million Btu of fuel. The higher the price, the dirtier the fuel.

Lignite $1.47 Subbituminous coal $1.45 Bituminous coal $1.40 Residual Fuel Oil $1.18 Crude Oil $1.12 Gasoline $1.07 Natural Gas $0.80 All amounts from the Carbon Tax Center.

The advantages of a carbon tax are argued to be: Possibly less complex, expensive, and time-consuming to implement. This advantage is especially great when applied to markets like gasoline or home heating oil. Perhaps some reduced risk of certain types of cheating, though under both credits and taxes, emissions must be verified. Reduced incentives for companies to delay efficiency improvements prior to the establishment of the baseline if credits are distributed in proportion to past emissions. When credits are grandfathered, this puts new or growing companies at a disadvantage relative to more established companies. Allows for more centralized handling of acquired gains Worth of carbon is stabilized by government regulation rather than market fluctuations. Poor market conditions and weak investor interest have a lessened impact on taxation as opposed to carbon trading.

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Emission Trading Scheme (EU ETS)." Europa.http://ec.europa.eu/environment/climat/emission.htm

"Joint Implementation (JI)." UNFCCC. http://unfccc.int/kyoto_protocol/mechanisms/joint_implementation/items/ 1674.php

"Kyoto Protocol." United Nations Framework Convention on Climate Change.http://unfccc.int/kyoto_protocol/items/2830.php

"Lightly carbonated." The Economist. August 2, 2007.http://www.economist.com/business/displaystory.cfm?story_id=9587705

O'Halloran, Julian. "Carbon trade scheme 'is failing.'" BBC News. June 5, 2007. http://news.bbc.co.uk/2/hi/programmes/file_on_4/6720119.stm

Sanders, Eli "Rebuffing Bush, 132 Mayors Embrace Kyoto Rules." The New York Times. May 14, 2005. http://www.nytimes.com/2005/05/14/national/14kyoto.html? ex=1273723200&en=c02e1cce1ca43706&ei=5088

"The Senate Proposals." The Washington Post.http://www.washingtonpost.com/wpdyn/content/graphic/2007/07/14/ GR2007071401459.html.

Tietenberg, Tom. "European Union Emissions Trading Scheme (EU ETS). The Encyclopedia of Earth. January 30, 2007. http://www.eoearth.org/article/European_Union_Emissions_Trading_ Scheme_(EU_ETS)

Vedantam, Shankar. "Kyoto Treaty Takes Effect Today." The Washington Post. February 16, 2005. http://www.washingtonpost.com/wp-dyn/articles/A27318-2005Feb15.html