**4. Carbon trading**

Carbon trading is a market-based mechanism for helping mitigate the increase of CO<sup>2</sup> in the atmosphere. Carbon trading markets are developed to bring buyers and sellers of carbon credits together with standardized rules of trade. Any entity, typically a business, that emits CO<sup>2</sup> to the atmosphere may have an interest or may be required by law to balance their emissions through the mechanism of carbon sequestration. These businesses may include power-generating facilities or many kinds of manufacturers. Entities that manage forest or agricultural land might sell carbon credits based on the accumulation of carbon in their forest trees or agricultural soils. Similarly, business entities that reduce their carbon emission may be able to sell their reductions to other emitters. The legal aspect of carbon trading is CERs. In other words, carbon trading is a market mechanism for reducing GHG emissions. The idea is to price the carbon so that the activities that emit GHG become expensive. The carbon trading section allows companies to buy and sell carbon credits on the carbon market. Therefore, companies can continue to produce GHG as long as they can buy enough credit to cover their emissions. In addition, the credit market also allows the government to ramp prices by controlling credit supply, thus accelerating the transition away from activities that release GHG [25].

Like other goods or services, the price of carbon credits in carbon trading is established by the intersection of supply and demand. Contrary to regulated markets where supply and demand for carbon credits are regulated through complex regulation, supply and demand for carbon credits respond to free market transactions.

One of the factors that support the determination of carbon trading is the rise in energy prices in the world. This encourages people to reduce their consumption and lower their personal share of global emissions. But beyond that, there is actually a growing framework of economic solutions to this problem. Two major market-based options exist, and politicians around the world have largely settled on carbon trading over their rivals, the carbon tax, as the method chosen to regulate GHG emissions. In carbon trading is not separated by the carbon tax. The alternative to markets for carbon prices is to impose a carbon tax. It has never been a popular choice with voters and is government-dependent to act reasonably both in how they impose the tax and what they do with revenues. Therefore, for taxes to have a mitigating effect on global warming, governments need to spend on revenues for schemes that reduce emissions or buy carbon credits so that net emissions are reduced. Carbon trading takes pressure from governments to source and fund emissions reductions because price pressures make activity change. Emitter must buy permission or credit in the market to balance (offset) the equivalent carbon dioxide that they directly or indirectly release into the atmosphere.

**3.4. Voluntary carbon market (VCM) scheme**

12 Renewable Resources and Biorefineries

**4. Carbon trading**

CO<sup>2</sup>

part of the global carbon market, the voluntary CO<sup>2</sup>

carbon credits respond to free market transactions.

The voluntary carbon market (VCM) scheme is slightly different from CDM, REDD+, and JI. As

under the Kyoto Protocol and the EU-ETS.Rather than undergoing the national approval of project participants and the registration and verification process of the United Nations Framework Convention on Climate Change (UNFCCC), the calculation and certification of emissions reductions are carried out in accordance with a number of industry-made standards. The advantage of lower development or transaction costs makes the voluntary market particularly attractive to

small and sustainable projects where the UN certification process is too expensive.

ket is much smaller. The credits coming from the voluntary CO<sup>2</sup>

Compared with compliance markets such as EU-ETS, the total size of the voluntary CO<sup>2</sup>

in VER projects to reduce their carbon footprint and to achieve "zero emission" status.

Carbon trading is a market-based mechanism for helping mitigate the increase of CO<sup>2</sup>

atmosphere. Carbon trading markets are developed to bring buyers and sellers of carbon credits together with standardized rules of trade. Any entity, typically a business, that emits

One of the factors that support the determination of carbon trading is the rise in energy prices in the world. This encourages people to reduce their consumption and lower their personal share of global emissions. But beyond that, there is actually a growing framework

 to the atmosphere may have an interest or may be required by law to balance their emissions through the mechanism of carbon sequestration. These businesses may include power-generating facilities or many kinds of manufacturers. Entities that manage forest or agricultural land might sell carbon credits based on the accumulation of carbon in their forest trees or agricultural soils. Similarly, business entities that reduce their carbon emission may be able to sell their reductions to other emitters. The legal aspect of carbon trading is CERs. In other words, carbon trading is a market mechanism for reducing GHG emissions. The idea is to price the carbon so that the activities that emit GHG become expensive. The carbon trading section allows companies to buy and sell carbon credits on the carbon market. Therefore, companies can continue to produce GHG as long as they can buy enough credit to cover their emissions. In addition, the credit market also allows the government to ramp prices by controlling credit supply, thus accelerating the transition away from activities that release GHG [25]. Like other goods or services, the price of carbon credits in carbon trading is established by the intersection of supply and demand. Contrary to regulated markets where supply and demand for carbon credits are regulated through complex regulation, supply and demand for

emission reductions (VERs). Currently, VER is mostly used by companies that want to voluntarily offset the emissions generated during their business activities to demonstrate social responsibility and build a healthy and green corporate image. More companies are investing

market differs from the compliance schemes

mar-

in the

market are called voluntary

Once a carbon market is formed, buyers and sellers can bargain prices and volumes. In fact, carbon trading becomes complicated because buyers, who recall being forced to buy credits to offset the reported emissions, look for the best prices. Soon, all sorts of financial mechanisms emerge to protect themselves from risks, minimize costs, and make deals. Secondary markets in on-selling, bundling, and derivative credits will emerge that outstrip the volume and market value for primary credits. Sellers are those who have generated carbon credits from emission reduction projects, reductions or sequestration that generate carbon offsets, or have allocated credit.

In the free market, supply and demand will determine the price. However, the carbon market is not a free market because the reason for carbon trading is to reduce GHG emissions. One of the problems in carbon trading is the declining carbon price. To ensure the increase in the carbon price, the number of permits and credits allowed in the limited system is the cap. Supply cannot meet demand and the price goes up. This is what is known as the cap-andtrade system. Initially, demand will continue to increase along with rising emissions. This emission will occur only as a result of economic growth which is the foundation of the capitalist economic system and a necessity when the human population grows at 8,000 per hour. Limits on credit supply can be achieved by limiting the issuance of faux credits (emissions allowances or permits) and real credits resulting from mitigation, reduction, and reimbursement projects. Thus, there will be a balance. In this case, there should be enough credit to meet the demand because the issuer is forced to pay. In addition, carbon markets should also create opportunities for cost savings, but the price per credit also needs to rise [25].

Sometimes, carbon trading is called emissions trading, as it is a market-based tool for limiting GHG. The carbon market trades emissions under a cap-and-trade scheme or with credits that pay or offset the reduction of GHG [26]. The cap-and-trade scheme is the most popular way to regulate carbon dioxide (CO<sup>2</sup> ) 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 companies or firms that do not have enough allowances to cover their emissions must either deduct or purchase another company's reserve credit. Members with extra allowances may sell it or give it to the bank for future use. In practice, the cap-andtrade scheme can be either mandatory or voluntary.

Success of the cap-and-trade scheme relies heavily on strict but feasible constraints that reduce emissions over time. If the cap is too high, excess emissions will enter the atmosphere and the scheme will not affect the environment. A high cap can also decrease the value of benefits, causing losses to firms that have reduced their emissions and banked credit. If the cap is too low, its allowances are scarce and too expensive. Some cap-and-trade schemes have a safety valve to keep the value of allowance within a certain range. If the allowance price is too high, the scheme's governing body will release additional credits to stabilize the price. The price of allowances is usually a supply-and-demand function. Credits are similar to carbon offsets except that they are often used in conjunction with a cap-and-trade scheme. Firms wishing to reduce the targets can fund pre-approved emission reduction projects on other sites or even in other countries.

of a new and verifiable government funding agency REDD+ and verification by a third party. With regard to transaction costs, the first and second strategies are believed to be lower than

From Forest Biomass to Carbon Trading http://dx.doi.org/10.5772/intechopen.80395 15

Actually, REDD+ can be an effective incentive mechanism and efficient in reducing emissions. The incentives in question are benefits derived from REDD activities in the form of financial support and/or technology transfer and/or enforcement. Thus, the incentive scope may be in the form of monetary or non-monetary incentives. The success of running REDD+ is very much in line with the policy used for the expenses incurred. In other words, the scope of activities in REDD+ implementation for the purpose of reducing carbon emissions will definitely bring other benefits such as co-benefits, environmental services, forest sustainability, biodiversity, etc. However, the performance of REDD+ implementation is measured by looking at the ability of developers in reducing carbon emissions. This problem is related to the amount of carbon emission reductions generated through the measurable, reportable, and

In addition, REDD+ also has negative impacts such as reduced public access to forest resources, reduced forest industry investment, and reduced forest sector economic contribution. The pressure on the existence of forests takes place in various forms of activities such as encroachment, illegal logging that occurs as a result of low socioeconomic conditions of people or below the poverty line. Pressure on REDD+ sustainability will certainly increase as commodity prices increase and as lands are used for agriculture, plantation, mining, etc. These pressures need to be considered as they relate to lower REDD+ competitiveness compared to other land-based commodities such as palm oil, coconut, and mining. This is indicated by the price per ton of carbon that must be applied to compensate the costs of other businesses such as oil palm and rubber plantations. The competitiveness of REDD+ can also be low again due to the high transaction costs that must be incurred. The high cost of such transactions is usually due to the lengthy process of issuing and trading certificates of reducing forest carbon emissions. Transaction costs in the production process are undesirable costs because the existence of these transaction costs makes commodity prices inefficient as prices become more expensive

It should be emphasized, however, that transaction costs in REDD+ implementation are costs that must be taken into account. This is related to institutional costs inherent in REDD+ implementation, at least cost for contracting, searching and disseminating information, handling conflicts of interest that occur between stakeholders, validation and verification activities, and certification of emission reduction and credit buffer in case of leakage and non-permanence. The transaction costs will also increase in line with the intensive coordination between stakeholders involved as an effort to avoid conflict between stakeholders [27]. The effect of transac-

The key to successful implementation of REDD+ is the implementation of carbon conservation activities properly and correctly. Carbon conservation activities will have a major impact on the economy and the environment. The carbon conservation effort will have an

tion costs on the price and quantity of carbon is presented in **Figure 1.**

**5.1. Types of risks facing REDD+ and project financing**

the third strategy.

variable (MRV) system.

and tradable goods become less.

From the above description, carbon trading is actually a clever set of ideas that utilize market mechanisms that have been sharpened from generation to generation in capitalist economy. Of course, this will allow some investors to make serious money, and it fits with the adverse risks in the midst of current politics. Furthermore, these ideas will change our greenhouse gas emissions because, in time, it will be too expensive to release greenhouse gases. Unfortunately, no one is really sure if carbon trading will be able to change it fast enough [25].
