Emissions trading schemes

Definition

Emissions trading schemes (ETS) are market-based approaches aimed at reducing greenhouse gas emissions by allowing companies to buy and sell allowances for their emissions. Each allowance permits the holder to emit a specific amount of greenhouse gases, creating a financial incentive for companies to lower their emissions. As regulations evolved to address climate change, these schemes emerged as a practical tool for achieving emission reduction targets efficiently and cost-effectively.

5 Must Know Facts For Your Next Test

1. The first major emissions trading scheme was implemented in the United States in the 1990s to address sulfur dioxide emissions, showcasing the effectiveness of market mechanisms in environmental regulation.
2. In 2005, the European Union launched the EU Emissions Trading System, which has become one of the largest carbon markets in the world, covering multiple industries and aiming to reduce greenhouse gas emissions across member states.
3. Emissions trading schemes create a financial incentive for companies to innovate and adopt cleaner technologies by allowing them to sell excess allowances if they reduce their emissions below required levels.
4. Critics argue that emissions trading schemes can lead to 'hot spots' where pollution is concentrated, as companies may choose to buy allowances instead of reducing actual emissions, highlighting the need for robust monitoring and regulation.
5. The success of emissions trading schemes often relies on accurate measurement and reporting of emissions, which ensures that the cap is enforced and environmental goals are met.

Review Questions

• How do emissions trading schemes utilize market mechanisms to achieve environmental goals?
  • Emissions trading schemes utilize market mechanisms by setting a cap on total greenhouse gas emissions and allowing companies to buy and sell allowances within that limit. This creates a financial incentive for companies to reduce their emissions; if they exceed their allocated allowances, they must purchase more or face penalties. Companies that lower their emissions can sell excess allowances, thus rewarding innovative practices and investments in cleaner technologies while helping achieve overall emission reduction targets.
• Discuss the potential benefits and drawbacks of implementing an emissions trading scheme as a policy tool for reducing greenhouse gas emissions.
  • The potential benefits of implementing an emissions trading scheme include cost-effectiveness, as it allows companies with lower abatement costs to reduce more emissions while others purchase allowances. This flexibility can lead to significant reductions at lower costs compared to traditional regulatory approaches. However, drawbacks include the risk of creating 'hot spots' where pollution may concentrate due to buying allowances instead of reducing actual emissions. Additionally, the effectiveness of such schemes heavily depends on accurate monitoring and robust regulatory frameworks to ensure compliance.
• Evaluate how the evolution of environmental legislation has influenced the development and implementation of emissions trading schemes in various countries.
  • The evolution of environmental legislation has played a crucial role in shaping the development and implementation of emissions trading schemes across different countries. As awareness of climate change grew and international agreements like the Kyoto Protocol established binding targets for greenhouse gas reductions, countries sought flexible mechanisms like ETS to comply with these commitments. The success of initial programs, such as the U.S. Acid Rain Program, demonstrated the potential of market-based solutions, prompting other nations, particularly in Europe, to develop their own systems. This evolution reflects a shift towards recognizing economic incentives as effective tools in achieving environmental goals while balancing economic growth.

Related terms

Carbon credits: Permits that represent the right to emit one metric ton of carbon dioxide or its equivalent in other greenhouse gases, which can be traded within an emissions trading scheme.

Cap-and-trade: A system where a limit (cap) is set on emissions, and companies can trade allowances to meet their emissions targets, incentivizing reductions while allowing flexibility in compliance.

Offset credits: Certificates that represent a reduction in greenhouse gas emissions from a project that can be used to compensate for emissions produced elsewhere, often part of a broader carbon market.