Emission trading

Definition

Emission trading is a market-based approach to controlling pollution by providing economic incentives for reducing emissions of pollutants. This system allows companies to buy and sell permits that enable them to emit a certain amount of pollutants, effectively creating a financial motive to reduce emissions where it is most cost-effective to do so. By linking emission allowances with air quality goals, it aims to lower the overall level of air pollutants from various sources.

5 Must Know Facts For Your Next Test

1. Emission trading has been implemented in various regions, including the European Union's Emissions Trading System, which targets greenhouse gas emissions from power plants and factories.
2. The system is designed to provide flexibility for companies to meet their emission reduction targets by allowing them to trade permits based on their individual circumstances.
3. By setting a cap on total emissions, emission trading creates a scarcity of permits, which can drive up their price and encourage more significant reductions in pollution.
4. Emission trading systems can lead to cost savings for businesses by allowing them to choose the most economical way to reduce emissions rather than following a uniform regulatory approach.
5. The success of emission trading relies heavily on accurate monitoring and reporting of emissions to ensure the integrity of the trading system.

Review Questions

• How does emission trading create economic incentives for companies to reduce their air pollutants?
  • Emission trading creates economic incentives by allowing companies to buy and sell pollution permits. When companies reduce their emissions below their allotted limit, they can sell their excess permits for profit. This financial motivation encourages firms to invest in cleaner technologies or practices, as they can lower their operational costs and generate additional revenue through the sale of unused permits.
• Discuss the potential benefits and drawbacks of implementing an emission trading system for air quality management.
  • The benefits of an emission trading system include cost-effectiveness, as it allows reductions where they are cheapest and promotes innovation in pollution control technologies. However, drawbacks may include the complexity of setting up the trading market, ensuring compliance and monitoring emissions accurately. Additionally, if not designed properly, such systems could lead to inequities where larger polluters benefit disproportionately or where overall environmental goals are not met due to inadequate caps.
• Evaluate the effectiveness of emission trading systems in reducing overall air pollution levels and achieving regulatory goals.
  • To evaluate the effectiveness of emission trading systems, one must consider empirical data on air quality improvements since their implementation. Successful systems show a significant reduction in pollutants while maintaining economic growth. However, some critiques suggest that without strict regulatory oversight and well-defined caps, these systems can lead to loopholes and insufficient reductions. Comprehensive assessments should analyze both environmental outcomes and economic impacts to gauge true effectiveness and guide future policy decisions.

Related terms

cap-and-trade: A regulatory system that sets a cap on the total level of greenhouse gas emissions and allows industries with low emissions to sell their extra allowances to larger emitters.

carbon credits: Permits that represent the right to emit one metric ton of carbon dioxide or an equivalent amount of a different greenhouse gas, used in various emission trading schemes.

pollution permit: A license granted by a government or regulatory authority allowing a company to emit a specific quantity of pollutants, which can be traded with other companies.