Carbon Liability

By the term ‘carbon liability’, we mean a calculation of value approximating to the economic externalities of carbon emissions in the global economy, in relation to the totality of global economic activity. As a consequence of over two centuries of industrialization, the global carbon budget and its associated global balance sheet of carbon have clearly diverged from a state of natural equilibrium. Three material identifiable, types of carbon risk have emerged; related to regulation, to physical processes and to market-related risk. ‘Cap-and-trade’ schemes are an important economic mechanism aiding both the rectification of these imbalances and the restoration of a natural carbon cycle disrupted by emissions of anthropogenic greenhouse gas (GHG) in both developed and emerging economies. Such schemes establish an economic value to carbon through open market trading. They serve to quantify and to reduce carbon risk, in accordance with appropriate and efficient economic regulation. Monetizing carbon liability through these market mechanisms is a means to place boundaries on, and thus to mitigate, the uncertainties of carbon liability. This process of monetization may also transform market risk into an opportunity for economic exploitation.