Emissions Trading Schemes

Definition

Emissions trading schemes (ETS) are market-based approaches designed to reduce greenhouse gas emissions by allowing companies to buy and sell allowances for their emissions. The idea is to create a financial incentive for companies to lower their emissions by putting a price on carbon. This system connects to international agreements and policies on climate change by helping countries meet their emission reduction targets in a flexible and cost-effective manner.

5 Must Know Facts For Your Next Test

1. Emissions trading schemes can help countries achieve their climate goals set out in international agreements like the Paris Agreement by providing flexible pathways for reducing overall emissions.
2. The effectiveness of an emissions trading scheme relies on having a clear cap on total emissions and a robust monitoring system to track compliance.
3. ETS can encourage innovation by providing companies with financial incentives to develop cleaner technologies and reduce their carbon footprint.
4. These schemes can lead to significant cost savings for companies, as they can purchase cheaper allowances rather than investing heavily in immediate emissions reductions.
5. Some criticisms of emissions trading schemes include concerns about market volatility and the potential for 'greenwashing', where companies might rely on buying credits instead of making real changes to reduce emissions.

Review Questions

• How do emissions trading schemes function as a tool for achieving international climate goals, and what role do they play in the flexibility of compliance?
  • Emissions trading schemes function by creating a market for emission allowances, allowing companies to buy and sell these permits based on their emission needs. This flexibility enables countries to meet their international climate goals more efficiently, as businesses can choose the most cost-effective strategies for reducing their overall emissions. By allowing companies that can reduce emissions cheaply to sell their allowances to those facing higher costs, ETS incentivizes reductions where they are most economically viable.
• Discuss the advantages and potential drawbacks of using cap-and-trade systems within emissions trading schemes to manage greenhouse gas emissions.
  • Cap-and-trade systems provide several advantages, including setting a clear limit on overall emissions while allowing companies the flexibility to trade allowances. This creates financial incentives for companies to innovate and reduce emissions at lower costs. However, potential drawbacks include market volatility that can lead to fluctuating prices for allowances and the risk of companies purchasing credits instead of making substantial efforts to reduce their own emissions. This could undermine the integrity of the system if not managed properly.
• Evaluate the long-term impact of emissions trading schemes on corporate behavior regarding environmental responsibility and sustainability initiatives.
  • The long-term impact of emissions trading schemes on corporate behavior can be significant in promoting environmental responsibility and sustainability initiatives. By putting a price on carbon, companies are more likely to prioritize investments in cleaner technologies and practices that lower their emissions over time. This shift in corporate strategy can lead to broader cultural changes within organizations, fostering innovation and commitment to sustainability goals. However, the effectiveness of this impact depends on the robustness of regulatory frameworks and the commitment from both businesses and governments to genuine emissions reduction efforts rather than relying solely on trading mechanisms.

Related terms

Carbon Credits: Carbon credits are permits that allow the holder to emit a certain amount of carbon dioxide or equivalent greenhouse gases. One credit typically represents one ton of emissions.

Cap-and-Trade: Cap-and-trade is a specific type of emissions trading scheme where a limit (cap) is set on total emissions, and companies can trade allowances to meet their individual emission reduction goals.

Carbon Market: A carbon market is a marketplace where carbon credits are bought and sold, enabling businesses and governments to trade emission allowances as part of their climate action strategies.