Emissions trading schemes

Definition

Emissions trading schemes (ETS) are market-based approaches to controlling pollution by providing economic incentives for reducing emissions of pollutants. These schemes allow companies to buy and sell allowances for greenhouse gas emissions, creating a financial motivation to lower emissions and invest in cleaner technologies. By setting a cap on total emissions, these systems encourage organizations to develop innovative strategies for carbon reduction while promoting overall sustainability within supply chains.

5 Must Know Facts For Your Next Test

1. Emissions trading schemes can significantly reduce overall emissions by allowing companies that can reduce emissions at lower costs to do so and sell their excess allowances.
2. These schemes create a financial market for carbon, encouraging companies to innovate and adopt cleaner technologies in order to minimize costs.
3. Participation in an ETS can help companies comply with regulatory requirements while also enhancing their reputation as environmentally responsible organizations.
4. The effectiveness of emissions trading schemes largely depends on the design of the system, including the cap level, allocation of allowances, and monitoring and enforcement mechanisms.
5. Some notable examples of emissions trading schemes include the European Union Emissions Trading System (EU ETS) and California's Cap-and-Trade Program.

Review Questions

• How do emissions trading schemes encourage companies to reduce their carbon footprint?
  • Emissions trading schemes encourage companies to reduce their carbon footprint by creating a market for carbon allowances. Companies that successfully lower their emissions can sell their surplus allowances to those that find it more expensive to reduce their emissions. This financial incentive motivates organizations to innovate and adopt cleaner technologies, ultimately contributing to overall reductions in greenhouse gas emissions within supply chains.
• Evaluate the effectiveness of different design elements of emissions trading schemes in achieving carbon reduction goals.
  • The effectiveness of emissions trading schemes hinges on several key design elements, including the cap level set on total emissions, the method of allowance allocation, and robust monitoring and enforcement mechanisms. A well-designed cap ensures that overall emissions are effectively reduced, while an appropriate allocation method prevents market distortions. Additionally, strong monitoring and enforcement ensure compliance among participants, which is crucial for the integrity and success of the scheme in achieving its intended carbon reduction goals.
• Assess the broader implications of adopting emissions trading schemes on global supply chain sustainability practices.
  • Adopting emissions trading schemes has significant implications for global supply chain sustainability practices. These schemes not only incentivize individual companies to lower their emissions but also promote a culture of accountability and transparency in environmental practices. As more businesses engage in emissions trading, they become part of a larger movement towards sustainable practices that prioritize environmental responsibility. This shift can lead to widespread changes in procurement strategies, supplier selection processes, and investment decisions across industries, ultimately driving innovation and efficiency in sustainable supply chains.

Related terms

Carbon Credit: A permit that allows the holder to emit one metric ton of carbon dioxide or an equivalent amount of a different greenhouse gas.

Cap-and-Trade: An environmental policy tool that controls emissions by setting a limit (cap) on total greenhouse gas emissions and allowing industries with low emissions to sell their excess allowances to larger emitters.

Carbon Neutrality: The state of having a net-zero carbon footprint by balancing emitted carbon with an equivalent amount sequestered or offset, often achieved through various carbon reduction strategies, including participation in ETS.