Emissions trading scheme

Definition

An emissions trading scheme (ETS) is a market-based approach used to control pollution by providing economic incentives for reducing emissions of pollutants. It allows companies to buy and sell allowances or credits for their greenhouse gas emissions, aiming to lower overall emissions in a cost-effective manner. This scheme connects to broader environmental issues and the green movement by promoting sustainable practices and addressing climate change through market mechanisms.

5 Must Know Facts For Your Next Test

1. The first formal emissions trading scheme was established in the United States in 1990 as part of the Clean Air Act Amendments to reduce sulfur dioxide emissions.
2. Emissions trading schemes can help countries meet their international climate commitments by allowing flexibility in how they achieve emissions reduction targets.
3. The European Union Emissions Trading System (EU ETS) is one of the largest and most well-known schemes globally, covering thousands of installations across member states.
4. An ETS promotes innovation by encouraging companies to invest in cleaner technologies and processes as they look to reduce their overall emissions.
5. The effectiveness of an emissions trading scheme often depends on the strictness of the cap set on emissions and how well the market is regulated.

Review Questions

• How does an emissions trading scheme function as a tool for reducing greenhouse gas emissions?
  • An emissions trading scheme functions by setting a cap on the total amount of greenhouse gases that can be emitted by all participating entities. Companies are allocated or can purchase allowances that represent the right to emit a specific amount. If they reduce their emissions below their allowance, they can sell the excess credits to other companies that are struggling to meet their limits. This market-based approach creates financial incentives for companies to lower their emissions and invest in greener technologies.
• Evaluate the potential challenges and criticisms of implementing an emissions trading scheme in New Zealand.
  • Implementing an emissions trading scheme in New Zealand faces several challenges, including ensuring fair allocation of emission allowances and preventing market manipulation. Critics argue that without strict regulations, companies might exploit loopholes or use offsets instead of genuinely reducing emissions. Additionally, there is concern about the impact on businesses and consumers, as costs associated with purchasing allowances could be passed down through increased prices. Balancing economic growth with environmental responsibility remains a complex task.
• Synthesize the role of emissions trading schemes within the broader context of global climate agreements and local environmental policies.
  • Emissions trading schemes play a critical role in global climate agreements like the Paris Agreement by providing countries with flexible mechanisms to meet their nationally determined contributions (NDCs). By allowing for market-driven solutions, these schemes help nations effectively allocate resources for emission reductions while fostering international cooperation. Locally, they can complement other environmental policies aimed at promoting sustainability, incentivizing renewable energy use, and encouraging businesses to adopt greener practices. This interconnected approach helps address climate change more comprehensively at both global and local levels.

Related terms

Carbon Credits: Permits that allow the holder to emit a certain amount of carbon dioxide or other greenhouse gases, which can be traded in an emissions trading scheme.

Cap and Trade: A system where a limit (cap) is set on emissions, and companies can trade their allowances, incentivizing them to reduce their emissions.

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