Emission trading schemes (ETS) are market-based approaches designed to reduce greenhouse gas emissions by allowing companies to buy and sell emission allowances. Each allowance permits the holder to emit a specific amount of carbon dioxide or its equivalent, thereby incentivizing organizations to lower their emissions as they can profit from selling excess allowances. These schemes connect environmental policy with economic incentives, promoting efficiency and innovation in reducing overall emissions.
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Emission trading schemes create a financial incentive for companies to lower their emissions by allowing them to profit from selling surplus allowances.
ETS can be implemented at various levels, including national, regional, or international scales, providing flexibility in addressing climate change.
The effectiveness of emission trading schemes relies on setting an appropriate cap that decreases over time, ensuring continuous improvement in emission reductions.
Some notable ETS include the European Union Emission Trading System (EU ETS) and California's Cap-and-Trade Program.
Emission trading schemes can face challenges such as market manipulation, unequal access to allowances, and potential impacts on energy prices.
Review Questions
How do emission trading schemes create economic incentives for companies to reduce their greenhouse gas emissions?
Emission trading schemes create economic incentives by allowing companies to buy and sell emission allowances. Companies that can reduce emissions at a lower cost can sell their excess allowances to others who may find it more expensive to cut their emissions. This market mechanism encourages innovation and efficiency, driving companies to find cost-effective ways to lower their overall emissions while also generating potential revenue.
Discuss the role of caps in emission trading schemes and how they impact the overall effectiveness of these programs.
Caps play a crucial role in emission trading schemes by establishing a limit on total greenhouse gas emissions allowed within a specific period. By setting a declining cap over time, these programs ensure that overall emissions decrease progressively. This creates urgency for companies to innovate and invest in cleaner technologies, ultimately enhancing the effectiveness of the scheme in achieving its environmental goals. If caps are too lenient, it could lead to minimal reductions in emissions.
Evaluate the potential challenges and criticisms associated with the implementation of emission trading schemes in global climate policy.
Challenges and criticisms related to emission trading schemes include issues like market volatility, lack of transparency, and potential loopholes that could undermine their effectiveness. Critics argue that ETS may allow polluters to continue emitting at high levels by purchasing allowances rather than reducing emissions at the source. Additionally, if not designed carefully, these schemes may disproportionately affect low-income communities and create barriers for new entrants into the market. Addressing these challenges is crucial for ensuring that emission trading schemes contribute meaningfully to global climate policy.
Related terms
Carbon Credits: Permits that represent the right to emit one metric ton of carbon dioxide or an equivalent amount of another greenhouse gas.
Cap-and-Trade: A system that sets a limit (cap) on total greenhouse gas emissions while allowing companies to trade allowances within that cap.
Offsetting: The practice of compensating for emissions by investing in projects that reduce or remove an equivalent amount of greenhouse gases from the atmosphere.