Emissions trading schemes

Definition

Emissions trading schemes (ETS) are market-based approaches to controlling pollution by providing economic incentives for reducing emissions. In these systems, companies or governments can buy and sell allowances for greenhouse gas emissions, encouraging overall reductions in emissions at the lowest cost. By capping the total emissions allowed and allowing trading of allowances, ETS helps allocate resources efficiently while promoting investment in cleaner technologies.

5 Must Know Facts For Your Next Test

1. Emissions trading schemes are designed to incentivize companies to reduce their emissions in a cost-effective manner, allowing flexibility in how they meet their targets.
2. The success of an ETS relies on setting a clear cap on emissions, as well as ensuring that allowances are scarce enough to drive up their value and encourage reductions.
3. Many countries and regions have implemented ETS, including the European Union's Emissions Trading System, which is one of the largest and most established.
4. ETS can lead to innovation in cleaner technologies as businesses seek cost-effective ways to reduce their emissions and trade excess allowances for profit.
5. Critics argue that emissions trading can lead to loopholes and market volatility if not properly regulated, undermining its effectiveness in combating climate change.

Review Questions

• How do emissions trading schemes create incentives for companies to reduce their greenhouse gas emissions?
  • Emissions trading schemes create financial incentives by allowing companies to buy and sell allowances for greenhouse gas emissions. If a company reduces its emissions below its allowance, it can sell its surplus permits to other companies that may be struggling to meet their caps. This creates a market where reducing emissions can be financially beneficial, motivating companies to invest in cleaner technologies and practices while still meeting regulatory requirements.
• Discuss the role of carbon credits within emissions trading schemes and how they function as a tool for regulating greenhouse gas emissions.
  • Carbon credits are integral to emissions trading schemes as they represent the right to emit a specific amount of greenhouse gases. When a company exceeds its allowable emissions, it must purchase additional credits from those who have reduced their emissions. This trading mechanism helps ensure that overall emissions stay within set limits while providing flexibility for businesses to manage their individual contributions. The ability to buy and sell these credits encourages both compliance with regulations and investment in lower-emission technologies.
• Evaluate the effectiveness of emissions trading schemes compared to direct regulation in achieving long-term climate goals.
  • Emissions trading schemes can be more flexible and economically efficient than direct regulation, as they allow companies the freedom to choose how to reduce emissions. However, their effectiveness depends on proper design and enforcement. If an ETS has weak caps or too many allowances, it might not drive meaningful reductions. In contrast, direct regulations guarantee specific outcomes but may lack cost-effectiveness. Ultimately, a combined approach utilizing both strategies may be necessary to ensure robust climate action and long-term sustainability.

Related terms

Cap-and-Trade: A system where a limit (cap) is set on the total level of greenhouse gas emissions, and companies can trade allowances to stay within that cap.

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

Offset Projects: Initiatives that reduce, avoid, or sequester greenhouse gas emissions, generating credits that can be sold in the emissions trading market to compensate for excess emissions elsewhere.