Emissions trading

Definition

Emissions trading is a market-based approach to controlling pollution by providing economic incentives for reducing emissions of pollutants. This system allows companies or countries to buy and sell allowances that permit them to emit a certain amount of greenhouse gases, thereby encouraging the reduction of overall emissions in a cost-effective manner. By linking economic activity with environmental responsibility, emissions trading plays a crucial role in sustainable development and environmental economics.

5 Must Know Facts For Your Next Test

1. Emissions trading aims to reduce overall greenhouse gas emissions while allowing market forces to determine the most cost-effective means of achieving these reductions.
2. The European Union Emissions Trading System (EU ETS) is one of the largest and most established examples of emissions trading, covering multiple sectors across Europe.
3. Companies that reduce their emissions below their allowance can sell their excess permits to other companies that may be struggling to meet their limits, promoting economic flexibility.
4. Emissions trading can create a financial incentive for innovation as companies seek new technologies and processes that allow them to reduce emissions more efficiently.
5. Critics argue that emissions trading can lead to 'pollution havens' where companies move operations to regions with weaker regulations, potentially undermining the overall goals of environmental protection.

Review Questions

• How does emissions trading encourage companies to reduce their greenhouse gas emissions?
  • Emissions trading encourages companies to reduce their greenhouse gas emissions by creating a financial incentive linked to market dynamics. Companies that lower their emissions below their allocated allowances can sell their excess credits to other firms that need additional allowances. This system allows companies to choose the most cost-effective methods for reducing emissions, leading to overall reductions while also promoting technological innovation in cleaner practices.
• Discuss the advantages and disadvantages of implementing an emissions trading system like the EU ETS.
  • Implementing an emissions trading system like the EU ETS has several advantages, including fostering economic efficiency by allowing firms flexibility in how they meet emission targets and driving investment in clean technologies. However, disadvantages include the potential for market volatility and the risk of creating inequalities among businesses, as larger firms may have more resources to invest in emissions reductions compared to smaller ones. Additionally, there is concern about ensuring transparency and fairness in how permits are allocated and traded.
• Evaluate the long-term impact of emissions trading on global efforts to combat climate change and promote sustainable development.
  • The long-term impact of emissions trading on global climate change efforts hinges on its ability to drive meaningful reductions in greenhouse gas emissions while supporting economic growth. If implemented effectively, emissions trading can incentivize businesses to adopt innovative practices that not only lower their carbon footprints but also contribute to sustainable development goals. However, its success requires robust regulatory frameworks and international cooperation, as unequal participation among countries could hinder collective action against climate change and exacerbate existing inequalities in global environmental policies.

Related terms

Cap-and-Trade: A system where a limit (cap) is set on total emissions and companies can buy or sell allowances to emit pollutants, creating a financial incentive to reduce emissions.

Carbon Credits: Permits that represent the right to emit one metric ton of carbon dioxide or an equivalent amount of a different greenhouse gas, which can be traded in carbon markets.

Pollution Permit: A license that allows the holder to emit a specific amount of pollutants, often used in emissions trading systems to regulate environmental impact.