Emission trading systems

Definition

Emission trading systems (ETS) are market-based approaches used to control pollution by providing economic incentives for reducing the emissions of pollutants. Under these systems, companies are given a limit on the amount of emissions they can produce and can trade allowances with one another, encouraging them to lower their emissions to sell excess allowances. This creates a financial motivation for businesses to innovate and adopt cleaner technologies, thereby supporting environmental sustainability.

5 Must Know Facts For Your Next Test

1. Emission trading systems were developed as a flexible approach to meet national and international climate commitments while promoting economic efficiency.
2. The European Union Emission Trading System (EU ETS) is one of the largest and most established emission trading systems in the world.
3. ETS can lead to cost-effective reductions in greenhouse gas emissions by allowing the market to determine the price of emission allowances based on supply and demand.
4. Emission trading systems can help achieve compliance with international agreements such as the Paris Agreement by setting legally binding targets for emission reductions.
5. The success of an emission trading system depends on proper monitoring, reporting, and verification of emissions data to ensure transparency and accountability.

Review Questions

• How do emission trading systems create economic incentives for companies to reduce their emissions?
  • Emission trading systems create economic incentives by allowing companies to trade emission allowances in a market setting. When a company reduces its emissions below its allowance, it can sell the surplus allowances to other companies that may be struggling to meet their limits. This trading mechanism encourages companies to invest in cleaner technologies and practices since they can profit from lowering their emissions while complying with regulatory requirements.
• Discuss the role of emission trading systems in meeting international climate commitments.
  • Emission trading systems play a crucial role in meeting international climate commitments by providing a framework for countries and companies to achieve specific emission reduction targets. By establishing a cap on total emissions and allowing flexibility through trading, ETS encourage innovative solutions while ensuring compliance with agreements like the Paris Agreement. This flexibility can lead to greater overall reductions in greenhouse gas emissions at lower costs compared to traditional regulatory approaches.
• Evaluate the effectiveness of emission trading systems in reducing greenhouse gas emissions and their potential challenges.
  • The effectiveness of emission trading systems in reducing greenhouse gas emissions largely depends on factors like the stringency of caps set, monitoring practices, and market dynamics. While they have shown potential for cost-effective reductions, challenges such as market volatility, regulatory loopholes, and unequal access to resources can undermine their goals. To maximize their effectiveness, continuous improvements in governance, transparency, and stakeholder engagement are necessary, ensuring that ETS align with broader environmental objectives.

Related terms

Cap-and-trade: A regulatory system that sets a limit on emissions (cap) and allows companies to buy and sell allowances (trade) for emitting pollutants within that limit.

Carbon credits: Permits that allow the holder to emit one ton of carbon dioxide or the equivalent amount of a different greenhouse gas, often used in emission trading systems.

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