Emission Trading System

Definition

An emission trading system (ETS) is a market-based approach used to control pollution by providing economic incentives for reducing the emissions of pollutants, primarily greenhouse gases. It allows companies to buy and sell allowances that permit them to emit a certain amount of pollutants, effectively putting a price on carbon emissions. This system connects the need for environmental protection with the flexibility of the market, encouraging innovation and cost-effective solutions to reduce overall emissions.

5 Must Know Facts For Your Next Test

1. Emission trading systems are designed to reduce overall emissions by allowing companies that can lower emissions more cheaply to sell their excess allowances to companies facing higher costs.
2. The first major ETS was launched in Europe in 2005 as part of the European Union's commitment to reduce greenhouse gas emissions under the Kyoto Protocol.
3. An effective ETS should have a stringent cap on total emissions to ensure that reductions are achieved without significant market volatility.
4. Emission trading systems can help stimulate technological innovation as companies seek cost-effective ways to reduce their emissions and maximize profit from trading allowances.
5. Countries implementing an ETS often experience a transition period where they gradually tighten emission caps, creating a predictable environment for businesses and investors.

Review Questions

• How does an emission trading system create economic incentives for companies to reduce their emissions?
  • An emission trading system creates economic incentives by allowing companies to buy and sell emission allowances based on their individual needs and costs. Companies that can reduce emissions at a lower cost can sell their excess allowances to those facing higher costs, promoting flexibility and encouraging overall reductions. This market-driven approach aligns financial interests with environmental goals, as companies can profit from lowering their emissions.
• Discuss the potential challenges and benefits of implementing an emission trading system in relation to acid rain reduction efforts.
  • Implementing an emission trading system can provide significant benefits for reducing acid rain by targeting sulfur dioxide and nitrogen oxide emissions, which contribute to this issue. However, challenges include ensuring adequate monitoring and enforcement of emissions limits, preventing market manipulation, and addressing concerns from affected communities. A well-designed ETS can lead to reductions in acid rain precursors while also fostering economic growth through innovation in pollution control technologies.
• Evaluate the effectiveness of existing emission trading systems in addressing climate change and improving air quality compared to traditional regulatory approaches.
  • Existing emission trading systems have shown varying degrees of effectiveness in addressing climate change and improving air quality. By enabling flexible compliance options, ETSs often achieve cost-effective reductions compared to traditional command-and-control regulations. However, their success depends on strict caps, robust enforcement mechanisms, and market stability. Analyzing data from various systems helps identify best practices and areas for improvement, guiding future policy decisions on how best to balance environmental goals with economic interests.

Related terms

Cap-and-Trade: A regulatory system that sets a limit (cap) on total emissions and allows companies to trade allowances, creating a market for emissions reductions.

Carbon Credits: Certificates representing the right to emit one ton of carbon dioxide or an equivalent amount of other greenhouse gases, which can be traded within an emission trading system.

Greenhouse Gases: Gases that trap heat in the atmosphere, contributing to climate change; key examples include carbon dioxide, methane, and nitrous oxide.