Emissions trading systems

Definition

Emissions trading systems (ETS) are market-based approaches to controlling pollution by providing economic incentives for reducing emissions of pollutants. Under these systems, companies or countries can buy and sell allowances that permit them to emit a certain amount of greenhouse gases, effectively putting a price on carbon. This mechanism encourages lower emissions and drives innovation in cleaner technologies, making it a crucial element in the fight against climate change.

5 Must Know Facts For Your Next Test

1. Emissions trading systems are designed to reduce overall greenhouse gas emissions by creating a financial incentive for companies to invest in cleaner technologies.
2. The first large-scale ETS was launched in Europe in 2005 as part of the European Union's commitment to reduce carbon emissions under the Kyoto Protocol.
3. ETS allows for flexibility; companies that can reduce emissions at a lower cost can sell their extra allowances, while those facing higher costs can purchase allowances to meet their obligations.
4. These systems help promote innovation by encouraging companies to find cost-effective ways to reduce emissions and improve energy efficiency.
5. In addition to environmental benefits, ETS can generate revenue for governments through the auctioning of emission allowances, which can be reinvested in sustainable projects.

Review Questions

• How do emissions trading systems incentivize companies to reduce their greenhouse gas emissions?
  • Emissions trading systems create a market for carbon credits, where companies are given allowances for emitting greenhouse gases. If a company reduces its emissions below its allowance, it can sell its excess credits to other companies that exceed their limits. This system encourages companies to invest in cleaner technologies and practices because they can profit from selling unused allowances. Ultimately, the financial incentive drives innovation and promotes a culture of sustainability within industries.
• Evaluate the effectiveness of cap-and-trade systems compared to traditional regulatory approaches for controlling emissions.
  • Cap-and-trade systems are often seen as more effective than traditional regulatory approaches because they set a clear limit on total emissions while providing flexibility for companies to find the most cost-effective solutions. Unlike fixed regulations that mandate specific emission reductions, cap-and-trade allows businesses to trade allowances based on their unique circumstances. This market-driven approach fosters competition among firms to develop innovative technologies and strategies for reducing emissions, leading to potentially greater overall reductions at lower costs.
• Assess the potential challenges and criticisms associated with emissions trading systems in the context of global climate policy.
  • While emissions trading systems are touted for their market efficiency, they face challenges such as market volatility, potential for manipulation, and unequal impacts on different sectors. Critics argue that without stringent oversight, companies may engage in 'gaming' the system by buying credits instead of making genuine reductions. Additionally, there are concerns about equity; poorer communities may bear the brunt of pollution without benefiting from trading schemes. As countries implement these systems as part of global climate policy, addressing these challenges will be critical to ensuring their effectiveness and fairness.

Related terms

Carbon Credits: Permits that allow the holder to emit one ton of carbon dioxide or an equivalent amount of a different greenhouse gas, which can be traded in emissions trading markets.

Cap-and-Trade: A regulatory system that sets a cap on total greenhouse gas emissions, allowing companies with low emissions to sell their extra allowances to larger emitters.

Greenhouse Gas: Gases in the Earth's atmosphere that trap heat, including carbon dioxide, methane, and nitrous oxide, contributing to global warming and climate change.