Emissions Trading

Definition

Emissions trading, also known as a cap-and-trade system, is a market-based approach to controlling pollution by providing economic incentives for achieving reductions in the emissions of various pollutants. It allows companies or countries that can reduce emissions at a lower cost to sell their extra allowances to those who find it more expensive to reduce their own emissions.

5 Must Know Facts For Your Next Test

1. Emissions trading provides a financial incentive for companies to reduce their emissions, as they can sell any excess allowances they have.
2. The overall cap on emissions is reduced over time, providing an incentive for companies to invest in cleaner technologies and practices.
3. Emissions trading systems have been implemented in various regions, including the European Union, California, and parts of China.
4. The success of an emissions trading system depends on the stringency of the emissions cap and the availability of cost-effective emission reduction opportunities.
5. Emissions trading is considered a more cost-effective approach to reducing emissions compared to traditional command-and-control regulations.

Review Questions

• Explain how emissions trading works as a market-based approach to controlling pollution.
  • Emissions trading, or cap-and-trade, is a market-based system that sets a limit or 'cap' on the total amount of a pollutant that can be emitted. Companies or countries are allocated a certain number of emission allowances, which they can trade with others. Companies that can reduce their emissions at a lower cost can sell their extra allowances to those who find it more expensive to reduce their own emissions. This creates a financial incentive for companies to invest in cleaner technologies and practices, as they can profit from selling their excess allowances.
• Describe the role of the Kyoto Protocol in the development of emissions trading as a mechanism for reducing greenhouse gas emissions.
  • The Kyoto Protocol, an international treaty adopted in 1997, established emissions reduction targets for developed countries and introduced emissions trading as a mechanism to help countries meet these targets. The protocol recognized that allowing countries to trade emission allowances or credits would provide a more cost-effective way to achieve the overall emissions reduction goals. This laid the groundwork for the implementation of various emissions trading systems around the world, such as the European Union Emissions Trading System (EU ETS) and regional trading schemes in North America and Asia.
• Evaluate the effectiveness of emissions trading in promoting sustainability and reducing the environmental impact of business activities.
  • Emissions trading can be an effective tool for promoting sustainability and reducing the environmental impact of business activities, but its success depends on several factors. When the emissions cap is set at a sufficiently low level and the trading system is well-designed, it can provide a strong financial incentive for companies to invest in clean technologies and reduce their emissions. This can lead to significant reductions in greenhouse gas emissions and other pollutants. However, the effectiveness of emissions trading can be limited if the cap is not stringent enough or if there are loopholes or other design flaws in the system. Additionally, the success of emissions trading relies on the availability of cost-effective emission reduction opportunities, which may vary across different industries and regions. Overall, emissions trading can be a valuable tool for promoting sustainability, but it must be carefully designed and implemented to maximize its environmental benefits.

Related terms

Cap-and-Trade: A regulatory system that sets a limit or 'cap' on the amount of a pollutant that can be emitted, and then allows companies or countries to trade emission allowances or credits.

Carbon Offset: A reduction in emissions of carbon dioxide or other greenhouse gases made to compensate for emissions made elsewhere, often used to meet voluntary or mandatory limits.

Kyoto Protocol: An international treaty that sets binding emission reduction targets for developed countries, which established the framework for emissions trading as a mechanism to help countries meet their targets.