Emissions trading

Definition

Emissions trading is a market-based approach to controlling pollution by providing economic incentives for reducing emissions of pollutants. It allows countries or companies to buy and sell allowances that permit them to emit a certain amount of greenhouse gases, creating a financial incentive for those who can reduce emissions more efficiently. This system connects the environmental goals with economic performance, facilitating compliance with international climate agreements.

5 Must Know Facts For Your Next Test

1. Emissions trading emerged as a key strategy following the Kyoto Protocol, which aimed to reduce global greenhouse gas emissions.
2. Countries participating in emissions trading can achieve compliance by purchasing allowances from other countries or entities that have excess allowances due to lower emissions.
3. The flexibility of emissions trading allows for cost-effective emission reductions, as companies can decide whether to invest in cleaner technologies or buy allowances.
4. Critics argue that emissions trading can create loopholes, where companies might rely more on buying allowances rather than making significant reductions in their own emissions.
5. Successful examples of emissions trading systems, like the European Union Emissions Trading System (EU ETS), have shown reductions in overall greenhouse gas emissions while promoting economic growth.

Review Questions

• How does emissions trading facilitate compliance with international climate agreements?
  • Emissions trading facilitates compliance with international climate agreements by allowing countries and companies to buy and sell emission allowances. This flexibility enables entities that can reduce emissions at a lower cost to sell their excess allowances to those facing higher costs, thus creating an economic incentive for reducing overall emissions. By linking financial interests with environmental goals, emissions trading makes it easier for participants to meet their commitments under agreements like the Kyoto Protocol.
• Discuss the potential benefits and drawbacks of implementing an emissions trading system in a country.
  • Implementing an emissions trading system can lead to significant benefits such as cost-effective emission reductions, fostering innovation in clean technologies, and generating revenue from the sale of allowances. However, drawbacks include the risk of market volatility, potential for abuse if regulations are not strict, and challenges in measuring actual emission reductions accurately. Balancing these factors is crucial for the success of an emissions trading program.
• Evaluate the effectiveness of the European Union Emissions Trading System (EU ETS) as a model for global emissions reduction efforts.
  • The EU ETS has been largely effective in reducing greenhouse gas emissions within the European Union by creating a structured market for carbon allowances. Its success has provided insights into how emissions trading can drive down costs and encourage investment in low-carbon technologies. However, challenges such as over-allocation of permits and fluctuating prices raise questions about its robustness as a model for global efforts. Continuous improvements and adaptations are necessary to enhance its effectiveness in addressing climate change on a larger scale.

Related terms

Cap-and-Trade: A system where a limit (cap) is set on emissions and companies can buy and sell permits to emit greenhouse gases within that cap.

Carbon Credits: Certificates that represent the right to emit one metric ton of carbon dioxide or equivalent greenhouse gases; they can be traded in emissions markets.

Offset Credits: Credits earned from projects that reduce or remove greenhouse gas emissions elsewhere, allowing entities to offset their own emissions.