Emissions trading systems

Definition

Emissions trading systems (ETS) are market-based approaches used to control pollution by providing economic incentives for reducing emissions of pollutants. Under an ETS, companies or governments can buy and sell allowances that permit them to emit a certain amount of greenhouse gases, promoting cost-effective reductions in overall emissions while allowing flexibility in how and when reductions occur.

5 Must Know Facts For Your Next Test

1. Emissions trading systems can help meet national and international climate goals by providing a flexible mechanism for achieving emission reduction targets.
2. ETS are designed to create a financial incentive for companies to innovate and find the most cost-effective ways to reduce emissions, leading to technological advancements.
3. The European Union Emissions Trading System (EU ETS) is one of the largest and most established emissions trading systems globally, covering numerous sectors and countries.
4. In a well-functioning ETS, the price of emissions allowances fluctuates based on supply and demand, which reflects the cost of reducing emissions in the market.
5. Critics of emissions trading systems argue that they can allow companies to continue polluting if they can afford to buy enough allowances, potentially undermining the intended environmental benefits.

Review Questions

• How do emissions trading systems create financial incentives for companies to reduce their greenhouse gas emissions?
  • Emissions trading systems create financial incentives by allowing companies to buy and sell allowances for emissions. When a company reduces its emissions below its allocated limit, it can sell its excess allowances to other companies that need them. This market dynamic encourages innovation and cost-effective methods for reducing emissions, as companies strive to minimize costs while meeting regulatory requirements.
• Evaluate the effectiveness of the European Union Emissions Trading System (EU ETS) in achieving its climate goals compared to other strategies.
  • The EU ETS has had mixed results in achieving its climate goals. While it has successfully reduced emissions in some sectors, challenges such as overallocation of permits and fluctuating allowance prices have sometimes weakened its impact. Compared to other strategies like direct regulation or renewable energy incentives, ETS provides flexibility but may not always lead to the most significant reductions unless properly managed and integrated with broader climate policies.
• Analyze how emissions trading systems can be designed to ensure they contribute meaningfully to climate change mitigation without enabling continued pollution.
  • To ensure that emissions trading systems effectively contribute to climate change mitigation, they should incorporate strict caps on total emissions, regular reviews of allowance allocations, and mechanisms to prevent market manipulation. Additionally, linking ETS with complementary policies such as renewable energy standards or carbon taxes can reinforce emission reductions. Moreover, transparency and accountability measures should be established to ensure that companies cannot simply purchase allowances as a way to avoid making real changes in their operations.

Related terms

Cap-and-Trade: A system where a limit (cap) is set on emissions, and companies can trade permits to emit within that limit, incentivizing lower emissions overall.

Carbon Credit: A permit that allows the holder to emit one ton of carbon dioxide or its equivalent in other greenhouse gases, which can be traded in carbon markets.

Offsets: Reductions in emissions that are used to compensate for emissions produced elsewhere, often generated through projects like reforestation or renewable energy.