Emission trading schemes

Definition

Emission trading schemes are market-based approaches used to control pollution by providing economic incentives for reducing emissions of pollutants. These schemes allow companies to buy and sell allowances that permit them to emit a certain amount of pollutants, promoting cost-effective emissions reductions and encouraging innovation in cleaner technologies.

5 Must Know Facts For Your Next Test

1. Emission trading schemes are designed to provide flexibility for businesses in how they meet regulatory requirements for emissions reductions.
2. These schemes can help lower the overall cost of achieving emission reduction goals by allowing companies with lower costs for reducing emissions to sell their excess allowances to companies facing higher costs.
3. Successful emission trading schemes often include a robust monitoring and reporting system to ensure accurate tracking of emissions and compliance.
4. The European Union Emission Trading Scheme (EU ETS) is one of the largest and most well-known examples of an emission trading scheme, covering multiple sectors across Europe.
5. Emission trading schemes can stimulate technological advancements as companies seek innovative solutions to lower their emissions and costs associated with purchasing allowances.

Review Questions

• How do emission trading schemes create economic incentives for companies to reduce pollution?
  • Emission trading schemes create economic incentives by allowing companies to buy and sell allowances that permit them to emit pollutants. When a company reduces its emissions below its allowance, it can sell the excess allowances to other companies that need them. This market mechanism encourages companies to find cost-effective ways to cut emissions, thus promoting overall reductions in pollution while maximizing economic efficiency.
• What are some potential advantages and disadvantages of implementing an emission trading scheme?
  • The advantages of implementing an emission trading scheme include fostering innovation as businesses seek cheaper ways to cut emissions, promoting cost-effectiveness in achieving environmental goals, and potentially leading to greater overall reductions in pollutants. On the downside, there may be challenges related to accurately monitoring emissions, ensuring fairness in allowance distribution, and the potential for market manipulation or volatility. Addressing these issues is crucial for the effectiveness of such schemes.
• Evaluate the effectiveness of the EU ETS in achieving its intended environmental goals and how it compares to other emission trading schemes worldwide.
  • The EU ETS has been largely effective in driving down greenhouse gas emissions from covered sectors by setting a clear cap on total emissions and allowing for trading of allowances. However, its effectiveness has been challenged by fluctuating allowance prices, over-allocation issues, and economic downturns that reduced overall demand for allowances. Compared to other schemes worldwide, such as California's cap-and-trade program, the EU ETS has broader coverage but faces similar challenges in maintaining a balance between economic growth and stringent emission reduction targets. Continuous adjustments are necessary to improve its robustness and ensure it meets long-term climate goals.

Related terms

Cap-and-Trade: A system where a limit (cap) is set on emissions, and companies can trade allowances to meet their emission reduction targets.

Carbon Credits: Permits that represent the right to emit a specific amount of carbon dioxide or its equivalent in other greenhouse gases, which can be bought and sold in emission trading schemes.

Renewable Energy Certificates (RECs): Tradable certificates that represent the property rights to the environmental benefits of generating renewable energy, often used alongside emission trading schemes to promote cleaner energy sources.