The Exponential-based Carbon Credit Cap in Carbon Cap-and- Trade Markets

Abstract

The concept of carbon markets as developed in 1997 by the Kyoto Protocol was a good idea whose adoption and implementation by all counties and states would have significantly reduced the rate of emission of greenhouse gases into the atmosphere. The Carbon markets were proposed to be based on cap-and-trade whose forces of supply and demand would discourage the increase or steady emission of greenhouse gases and force companies to, gradually, revert to the use of clean energy in production. This would promote the net zero carbon emission target. The carbon markets were designed to have a cap whose nature is a specific number for all entities. The number represents the carbon quantity whose regulator would keep reducing until the net zero carbon is achieved. This nature of the cap encourages large emitters of greenhouse gases to shift to other jurisdictions that have soft regulations. It also encourages restructuring into smaller companies whose net emissions could be almost the same or more than before. In this paper, we have proposed an exponential-based cap that would leave little or no room for such market strategies. We have also demonstrated how the proposed cap can be implemented