Emission Trading Schemes

Definition

Emission trading schemes (ETS) are market-based approaches used to control pollution by providing economic incentives for reducing emissions of pollutants. These schemes allow companies to buy and sell emission allowances, creating a financial motive for reducing greenhouse gas emissions while enabling flexibility in how reductions are achieved. By linking economic performance with environmental impact, ETS can encourage innovation in cleaner technologies and practices.

5 Must Know Facts For Your Next Test

1. Emission trading schemes aim to reduce overall emissions in a cost-effective way by allowing companies that can reduce emissions more easily to sell their excess allowances to those facing higher costs.
2. ETS can be implemented at various levels, including national, regional, or international scales, with systems like the EU Emission Trading System being one of the largest and most well-known.
3. The price of emission allowances can fluctuate based on market demand and supply, influencing companies' decisions on investing in cleaner technologies.
4. Emission trading schemes have been criticized for potential loopholes, including over-allocation of allowances and lack of stringent enforcement, which can undermine their effectiveness in reducing emissions.
5. Effective monitoring and reporting mechanisms are essential in emission trading schemes to ensure transparency and accountability in emissions reductions.

Review Questions

• How do emission trading schemes create economic incentives for companies to reduce their greenhouse gas emissions?
  • Emission trading schemes create economic incentives by allowing companies to trade emission allowances, which means they can profit from reducing their emissions below their allocated limits. Companies that can lower their emissions at a lower cost can sell their surplus allowances to others who face higher costs for reductions. This market-driven approach encourages innovation in cleaner technologies since companies are motivated to find the most efficient ways to lower their emissions while also benefiting financially.
• What challenges can arise from implementing emission trading schemes, and how might these affect their overall effectiveness?
  • Challenges that may arise include over-allocation of emission allowances, which can lead to less pressure on companies to reduce emissions. Additionally, if monitoring and enforcement are weak, it may result in insufficient accountability among participants. These issues can undermine the integrity of the scheme and ultimately limit its effectiveness in achieving significant reductions in greenhouse gas emissions. A well-designed ETS must address these challenges through robust regulations and transparent systems.
• Evaluate the impact of linking different emission trading schemes on global greenhouse gas reduction efforts and market dynamics.
  • Linking different emission trading schemes can significantly enhance global greenhouse gas reduction efforts by creating a larger market for carbon credits, thereby increasing liquidity and potentially lowering costs for compliance. This interconnectedness allows companies from different jurisdictions to trade allowances more freely, leading to more efficient allocation of resources for emissions reductions. However, it also requires harmonization of regulations and standards across regions, which can pose challenges in terms of governance and equity among participating countries. A successful linkage could lead to more ambitious climate goals being met on a global scale.

Related terms

Carbon Credits: Carbon credits are permits that allow the holder to emit a specific amount of carbon dioxide or other greenhouse gases, with one credit typically equal to one metric ton of CO2. These credits can be bought and sold within emission trading schemes.

Cap-and-Trade: Cap-and-trade is a specific type of emission trading scheme where a cap is set on the total level of greenhouse gas emissions, and companies receive or buy allowances that they can trade amongst themselves.

Carbon Market: The carbon market refers to the marketplace where carbon credits and allowances are traded, enabling the buying and selling of these assets to manage and reduce carbon emissions.