Emissions trading

Definition

Emissions trading is a market-based approach to controlling pollution by providing economic incentives for reducing emissions of pollutants. It allows companies or countries to buy and sell allowances that permit them to emit a certain amount of greenhouse gases, creating a financial incentive to reduce emissions below their allotted cap. This system connects the environmental goals of reducing pollution with the flexibility for industries to choose how they meet these goals, often leading to cost-effective reductions in overall emissions.

5 Must Know Facts For Your Next Test

1. Emissions trading systems can be implemented at various levels, including local, national, or international, allowing for flexibility in how emissions reductions are achieved.
2. The European Union Emissions Trading System (EU ETS) is one of the largest and most established emissions trading systems in the world, covering multiple sectors and allowing for significant reductions in greenhouse gas emissions.
3. Companies that reduce their emissions below their allocated allowance can sell their surplus credits, creating a financial incentive for innovation and investment in cleaner technologies.
4. Critics argue that emissions trading may allow companies to buy their way out of making real reductions in pollution, potentially undermining the environmental goals it aims to achieve.
5. Successful emissions trading programs often require robust monitoring and verification systems to ensure that reported emissions reductions are accurate and credible.

Review Questions

• How does emissions trading contribute to cost-effective pollution reduction among different industries?
  • Emissions trading allows companies to trade emission allowances, which creates a financial incentive for them to reduce their pollution levels more efficiently. Companies that can reduce emissions at a lower cost will do so and sell their excess allowances to those facing higher costs for reduction. This flexibility helps minimize the overall economic burden of achieving environmental targets while encouraging innovative approaches to reducing emissions.
• Discuss the potential advantages and disadvantages of implementing an emissions trading system as a regulatory approach to environmental protection.
  • One significant advantage of an emissions trading system is its ability to incentivize cost-effective reductions across various sectors while providing companies with flexibility in meeting their compliance obligations. However, disadvantages include the risk of allowing companies to purchase allowances instead of making meaningful reductions, potentially leading to insufficient overall emission cuts. Additionally, poorly designed systems could result in market volatility or inequitable impacts on smaller businesses versus larger corporations.
• Evaluate the effectiveness of the EU Emissions Trading System in achieving its intended goals and suggest improvements based on observed outcomes.
  • The EU Emissions Trading System has shown some effectiveness in reducing greenhouse gas emissions within participating countries, particularly in sectors like power generation. However, challenges such as allowance oversupply and price volatility have hindered its full potential. To improve its effectiveness, policymakers could tighten the cap on total emissions more rapidly, enhance monitoring mechanisms, and introduce stronger penalties for non-compliance. Furthermore, expanding the system's coverage to include more sectors may lead to more significant overall emission reductions.

Related terms

Cap-and-Trade: A system that sets a limit on emissions and allows companies with low emissions to sell their extra allowances to larger emitters, encouraging overall reductions.

Carbon Credits: Certificates that represent the right to emit one ton of carbon dioxide or its equivalent in other greenhouse gases, which can be traded in the emissions trading market.

Regulatory Compliance: The act of conforming to laws, regulations, and guidelines set by authorities regarding environmental protection and emissions reductions.