Emission trading

Definition

Emission trading, also known as cap-and-trade, is an environmental policy tool that allows companies to buy and sell allowances for greenhouse gas emissions, effectively putting a price on carbon. This system is designed to provide economic incentives for reducing emissions by creating a market for pollution rights, encouraging businesses to invest in cleaner technologies and practices.

5 Must Know Facts For Your Next Test

1. Emission trading aims to reduce overall greenhouse gas emissions while allowing market mechanisms to determine the most cost-effective way to achieve reductions.
2. Under this system, companies that can reduce their emissions at a lower cost can sell their excess allowances to companies facing higher reduction costs.
3. Emission trading has been implemented in various regions worldwide, including the European Union Emissions Trading System (EU ETS) and California's Cap-and-Trade Program.
4. This approach encourages innovation, as companies have a financial incentive to develop cleaner technologies and improve energy efficiency.
5. The effectiveness of emission trading can depend on factors like the stringency of caps, the availability of accurate monitoring systems, and market volatility.

Review Questions

• How does emission trading create economic incentives for companies to reduce greenhouse gas emissions?
  • Emission trading creates economic incentives by allowing companies to buy and sell allowances for greenhouse gas emissions. When a company reduces its emissions below its allowance, it can sell the excess permits to others that need them. This system motivates businesses to innovate and find cost-effective ways to cut emissions since they can benefit financially from selling unused allowances.
• Compare and contrast the effectiveness of emission trading systems in different regions or countries.
  • The effectiveness of emission trading systems can vary significantly based on design and implementation. For instance, the EU Emissions Trading System has seen substantial reductions in emissions due to strict caps and robust enforcement mechanisms. In contrast, some regional programs may struggle with oversupply of credits or lack of enforcement, leading to minimal impacts on actual emissions reductions. These differences highlight the importance of regulatory frameworks and market conditions in achieving desired environmental outcomes.
• Evaluate the long-term implications of emission trading on global efforts to combat climate change.
  • The long-term implications of emission trading on global climate change efforts are complex and multifaceted. If designed effectively, it can drive significant reductions in greenhouse gas emissions while promoting economic efficiency and innovation. However, challenges such as market manipulation, fluctuating prices, and uneven participation among countries could undermine its effectiveness. Therefore, establishing global standards and cooperation among nations will be crucial in ensuring that emission trading contributes meaningfully to global climate goals.

Related terms

Cap-and-Trade: A regulatory system that sets a maximum limit on emissions and allows companies to trade emission allowances within that limit.

Carbon Credits: Permits that represent the right to emit one ton of carbon dioxide or its equivalent in other greenhouse gases, which can be bought and sold in emission trading markets.

Greenhouse Gases: Gases such as carbon dioxide, methane, and nitrous oxide that trap heat in the atmosphere and contribute to climate change.