Oil trading means buying and selling oil. Pig belly trading means buying and selling pig bellies. Orange juice trading means ….. yes, you’ve got it, buying and selling gallons of orange juice. Probably millions of gallons actually.
In each case, when they buyer eventually closes the loop and doesn’t sell the commodity onto anyone else, they have to take delivery of the oil, the pig bellies or the orange juice. It’s all very logical.
The traders buy at one price and sell it, hopefully for them, at a higher price. The traders can even buy the commodity, as it’s called, and keep it in storage if they think the price is likely to rise - for example if they think there’s going to be a severe frost six months later in Florida when the oranges will all go pear shaped! In that case, they’d buy orange juice and keep it in storage (frozen hopefully) and then sell it when the big freeze pushes up prices. That’s how the traders make money.
But carbon trading is a whole new ball game. You can’t see carbon. You can’t hold it (even if you could see it) but you can calculate how much it’s supposed to weigh, flog it and make a fortune.
Companies these days are given an emission allowance of carbon by their government agency and are encouraged, through penalties, not to exceed their ‘cap’ or allowance. Generally the allowance means the company in question has to put in carbon reduction measures just to meet their cap but if they exceed it, they have to pay the penalty charges. Or, and this is where the carbon trading comes into play, they can buy an extra allowance from another company who might not use all their own allowance or who might have put in more efficient carbon emission solutions.
Like any other market where there are buyers and sellers, traders or brokers set up in business and offer a service to the companies – finding buyers for the sellers (of carbon allowance) and conversely, sellers for the buyers. No doubt they charge a commission on both sides, so probably make a fortune.
And just in case there are not enough ‘allowance sellers’, there are people who wander around the world looking for green projects such as new forests, wind farms and hydro-electric schemes. Companies, who think they might not meet their carbon allowance target can invest in these ‘clean’ schemes and thereby earn ‘credits’ to offset against their targets. Logically enough this is called Carbon Offsetting. Traders scour the world to find these schemes and then market them to companies looking for extra credits. And charge them for the privilege naturally!
And so there you have it. You can’t see it, weigh it or capture it but you can flog it. And have you noticed the easiest way for the airlines to do carbon offsetting? Yup – they ask you for a couple of ££££s when you book your flight and then claim to invest it in forests in Patagonia and hydro schemes in Africa. It’s the easy option. I don’t pay it – they should be trying to reduce the carbon emitted from their planes by getting more efficient aircraft – paying them a carbon offsetting fee is just getting them off the hook.