Emissions trading

Definition

Emissions trading is a market-based approach to controlling pollution by providing economic incentives for reducing the emissions of pollutants. It allows countries or companies with low emissions to sell their extra allowances to larger emitters, creating a financial motivation to cut emissions overall. This system is often linked to key international agreements aimed at reducing greenhouse gases and combating climate change, making it a critical tool in global environmental policy.

5 Must Know Facts For Your Next Test

1. Emissions trading schemes can help reduce overall emissions in a cost-effective manner by allowing market forces to dictate where reductions should occur.
2. The European Union Emissions Trading System (EU ETS) is one of the largest and most established emissions trading systems in the world.
3. Emissions trading can lead to innovation as companies seek new technologies and methods to lower their emissions and save costs.
4. Critics argue that emissions trading can lead to 'hot spots' where pollution may increase in areas with lax regulations while other areas benefit from cleaner air.
5. The success of emissions trading relies heavily on accurate monitoring, reporting, and verification of emissions data to ensure compliance and integrity of the system.

Review Questions

• How does emissions trading create financial incentives for companies to reduce their greenhouse gas emissions?
  • Emissions trading creates financial incentives by allowing companies that reduce their emissions below a certain cap to sell their excess allowances to other companies that exceed their limits. This market-based approach means that firms can profit from becoming more efficient and lowering their emissions, as they can monetize their unused allowances. Consequently, companies are motivated to invest in cleaner technologies and practices since there is a potential financial gain associated with reducing their overall emissions.
• Evaluate the effectiveness of emissions trading as a tool for international climate agreements compared to direct regulations.
  • Emissions trading is often seen as more flexible than direct regulations because it allows companies to find the most cost-effective ways to reduce emissions. While direct regulations set strict limits on pollution without market mechanisms, emissions trading encourages innovation and economic efficiency by leveraging market dynamics. However, its effectiveness can vary depending on design factors such as cap levels, enforcement mechanisms, and transparency in reporting, making it essential for policymakers to carefully evaluate its implementation in relation to specific environmental goals.
• Synthesize how the principles of emissions trading align with global efforts to combat climate change, particularly through international agreements like the Kyoto Protocol.
  • The principles of emissions trading align closely with global climate change efforts by providing a structured framework for reducing greenhouse gas emissions while accommodating economic growth. Through international agreements such as the Kyoto Protocol, countries commit to measurable emission reduction targets. Emissions trading facilitates these commitments by allowing flexibility in how reductions are achieved. Countries can trade carbon credits internationally, promoting cost-effectiveness in meeting their obligations. This mechanism supports collaborative action against climate change while incentivizing nations and companies to innovate and invest in sustainable practices.

Related terms

Cap-and-trade: A system where a limit (cap) is set on the total level of greenhouse gas emissions and permits are issued that allow emitters to release a certain amount of emissions.

Carbon credit: A permit that allows the holder to emit one ton of carbon dioxide or the equivalent amount of different greenhouse gases, which can be bought and sold in carbon markets.

Kyoto Protocol: An international treaty that commits its parties to reduce greenhouse gas emissions, based on the premise that global warming exists and human-made CO2 emissions have caused it.