Emissions trading

Definition

Emissions trading is a market-based approach used to control pollution by providing economic incentives for reducing the emissions of pollutants. Under this system, countries or companies can buy and sell allowances for emissions, creating a financial motive to reduce pollution and innovate in cleaner technologies. The goal is to reduce overall greenhouse gas emissions in an efficient manner while allowing flexibility in how reductions are achieved.

5 Must Know Facts For Your Next Test

1. Emissions trading originated from the United States in the 1990s, specifically through the Acid Rain Program aimed at reducing sulfur dioxide emissions.
2. The European Union Emissions Trading System (EU ETS) is one of the largest and most well-known emissions trading systems globally, covering multiple sectors and countries.
3. Emissions trading relies on market forces to determine the price of emissions allowances, promoting cost-effective reductions in pollution.
4. Countries participating in international agreements, like the Kyoto Protocol, have implemented emissions trading as a means to meet their greenhouse gas reduction targets.
5. The effectiveness of emissions trading can be influenced by market stability, regulatory frameworks, and overall compliance among participants.

Review Questions

• How does emissions trading create economic incentives for companies to reduce their pollution levels?
  • Emissions trading creates economic incentives by allowing companies to buy and sell allowances for pollution. If a company reduces its emissions below its allowance, it can sell the excess credits to other companies that are over their limits. This system encourages companies to invest in cleaner technologies because they can profit from selling unused allowances, effectively linking financial performance with environmental responsibility.
• Discuss the role of international agreements in shaping the framework for emissions trading systems worldwide.
  • International agreements like the Kyoto Protocol have played a significant role in establishing frameworks for emissions trading systems across different nations. These agreements set binding targets for greenhouse gas reductions, allowing countries to use emissions trading as a flexible mechanism to meet their commitments. By facilitating the buying and selling of emissions allowances, these agreements encourage cooperation among nations and promote global efforts to combat climate change.
• Evaluate the potential challenges and benefits associated with implementing emissions trading as part of climate policy.
  • Implementing emissions trading presents both challenges and benefits. On the positive side, it encourages innovation and cost-effective reductions in emissions while providing flexibility for businesses. However, challenges include ensuring market stability, preventing loopholes that allow companies to exploit the system, and maintaining equitable access to resources across sectors. Additionally, effective regulatory oversight is crucial to ensure that the goals of reducing greenhouse gas emissions are met without compromising environmental integrity.

Related terms

Cap-and-Trade: A system that caps total emissions and allows participants to buy and sell emission allowances within that cap.

Carbon Credits: Permits that represent the right to emit one ton of carbon dioxide or the equivalent amount of a different greenhouse gas.

Offsetting: A way to compensate for emissions by investing in projects that reduce or capture an equivalent amount of emissions elsewhere.