Emissions trading

Definition

Emissions trading is a market-based approach to controlling pollution by providing economic incentives for reducing emissions of pollutants. Under this system, companies or countries are given a limit on emissions and can trade allowances with others, creating a financial motive to cut back on pollution. This creates a flexible mechanism to achieve environmental goals while promoting economic efficiency.

5 Must Know Facts For Your Next Test

1. Emissions trading originated in the 1990s with the U.S. Acid Rain Program, which successfully reduced sulfur dioxide emissions through a cap-and-trade system.
2. This approach incentivizes companies to innovate and find cost-effective ways to reduce emissions, as they can sell excess allowances if they pollute less than their cap.
3. Emissions trading can lead to significant cost savings for businesses by allowing them to choose the most economical method for reducing emissions.
4. Several international agreements, including the Kyoto Protocol, established frameworks for emissions trading among participating countries as a means to combat climate change.
5. Critics argue that emissions trading can lead to 'hot spots' where pollution remains high in certain areas, as companies might buy allowances rather than reducing their emissions.

Review Questions

• How does emissions trading work, and what benefits does it provide for companies aiming to reduce their environmental impact?
  • Emissions trading allows companies to buy and sell allowances that permit them to emit specific amounts of pollutants. This system creates a financial incentive for companies to reduce their emissions, as those who cut back can sell their surplus allowances for profit. The flexibility in this approach means companies can choose how best to meet their emission reduction targets, leading to more cost-effective and innovative solutions for environmental protection.
• Evaluate the effectiveness of emissions trading compared to traditional regulatory approaches in controlling air pollution.
  • Emissions trading tends to be more effective than traditional regulatory approaches because it uses market forces to drive reductions in pollution. Traditional regulations often impose fixed limits without considering economic efficiency. In contrast, emissions trading creates a flexible environment where companies that can reduce emissions at lower costs do so, while others that face higher costs may opt to buy allowances. This market-based approach often results in greater overall reductions at lower costs compared to stringent regulations.
• Discuss the potential drawbacks of emissions trading systems and their implications for environmental justice and policy effectiveness.
  • While emissions trading systems can effectively reduce overall pollution levels, they may also have drawbacks such as the creation of 'hot spots' where pollution remains concentrated in specific areas. This can disproportionately affect low-income communities or marginalized groups, raising concerns about environmental justice. Additionally, if not well-regulated, these systems might lead companies to prioritize financial gain over genuine emissions reductions. Policymakers must therefore carefully design these systems to ensure they promote equitable outcomes while effectively addressing environmental goals.

Related terms

Cap-and-Trade: A system that sets a maximum limit (cap) on emissions and allows entities to buy and sell allowances that permit them to emit a certain amount of pollutants.

Carbon Credits: Certificates representing the right to emit one ton of carbon dioxide or its equivalent in other greenhouse gases, used in emissions trading systems.

Pollution Permit: A government-issued license that allows the holder to emit a specific amount of pollutants, which can be bought or sold in emissions trading markets.