Elements in Emission Trading Contrary to Shariah Rules
• An emission trading system (cap-and trade) is a quantity instrument because it fixes
the quantity of emission level and then allows the price to vary. This price depends on
market condition and any uncertainty in future supply and demand creates an
uncertainty in the future price of pollution credits, thus burden would fall on the
industry not on the organization/government that alters the caps set in through
unfairness thus leading to corruption.
• The London Financial market place is working as a center of Carbon Financial
Market, shows the type and category of financial players in the market. Also CDM
projects are criticized for favoring socially unjust projects.
• As Leonard (2009) found the Cap and Trade system gives unjust financial gains to
major polluters resulting from free permits, and cheating in connection with carbon
offsets.
• Regulatory agencies issues too many emission credits thus reducing the price very
low that gives huge losses to those who emit less and gives great advantage to those
who pollute the environment more.
• Emission Trading lacks proper accounting standards and an organized platform. So
lack of organized market leads to doubt about its legitimate viability.
• Credits are traded on the bases of projections which are manipulated by participants.
• It has been observed that the majority of the trade takes place through banks and
investors by speculating in the carbon market by offering carbon credits through
complex financial procedures and products similar to Sub-Prime Mortgages, therefore
creating a fear of crash of Emission Trading Market. These instruments are interest
based instruments.8
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International Conference on Islamic Economics and Finance
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• Carbon trading is buying and selling of an artificial commodity- The Right to Emit
Carbon Dioxide.
• There is frequent use of complex financial instruments known as derivatives. The
immediate buying and selling of carbon allowances and credits between companies and in
return for cash is known as ‘spot trading'. There are other types of more complex
transactions, including futures, forward and options contracts.These all are derivatives whose
value is derived from the value of another, underlying asset (Raghunathan and Rajib 2007),
for to reduce the risks associated with to purchase carbon permits.
• Emitters can produce more emissions than their permits by purchasing offset credits thus
desrtoying the nature ruthlessly.
• There are also other problems associated with projects based on off-setting, for
example social and environmental problems like displacement of communities.
• Most of the carbon permits and credits are held by people and organizations like large
financial institutions, investment funds and brokers who hold these just for making
money through speculation in buying and selling. Clifton (2009) mentioned windfall
gains between €23 billion and €63 billion during Phase II of Kyoto Protocol.
• Price is the main factor for emissions reductions under a trading scheme, a collapse in
the price of permits then creates disincentives; firms can buy and use them without
making any effort to reduce their emissions.
• The trading is not asset based. It works under an Artificial Commodity.