Emissions trading

Definition

Emissions trading is a market-based approach to controlling pollution by providing economic incentives for reducing the emissions of pollutants. This system allows countries or companies to buy and sell allowances that permit them to emit a certain amount of greenhouse gases, effectively capping overall emissions while providing flexibility in how those limits are met. This approach is often linked with international environmental agreements aimed at combating climate change and promoting sustainable practices.

5 Must Know Facts For Your Next Test

1. Emissions trading was first widely implemented under the Clean Air Act Amendments in the United States in the 1990s, specifically for sulfur dioxide.
2. The European Union Emission Trading System (EU ETS) is one of the largest and most established emissions trading systems globally, covering multiple sectors and countries.
3. Emissions trading promotes flexibility because companies can choose the most cost-effective way to reduce emissions, either by cutting their own emissions or purchasing allowances from others.
4. The effectiveness of emissions trading depends on setting a stringent cap on total emissions, ensuring that the market operates correctly and leads to genuine reductions.
5. Critics argue that emissions trading can lead to 'carbon leakage,' where companies move their operations to countries with less strict regulations, potentially undermining global emission reduction efforts.

Review Questions

• How does emissions trading work as a market-based approach to pollution control?
  • Emissions trading operates by setting a cap on total greenhouse gas emissions and allowing companies or countries to buy and sell emission allowances. Each allowance permits the holder to emit a specific amount of pollution, creating a financial incentive to reduce overall emissions. By enabling trades, companies that can reduce emissions at lower costs can sell their excess allowances to those facing higher reduction costs, thus promoting efficient pollution control.
• Evaluate the effectiveness of the European Union Emission Trading System in achieving its environmental goals.
  • The EU Emission Trading System has been pivotal in reducing greenhouse gas emissions in Europe since its inception. It provides a framework for countries to meet their climate targets while allowing flexibility through trading. However, challenges like fluctuating allowance prices and over-allocation of permits have raised questions about its effectiveness. Continuous adjustments and stricter caps are necessary for it to remain effective in driving meaningful emission reductions.
• Analyze the potential impacts of emissions trading on global climate agreements and international cooperation.
  • Emissions trading can significantly impact global climate agreements by facilitating international cooperation through flexible market mechanisms. Countries that are able to reduce their emissions more efficiently can sell allowances to those struggling to meet targets, fostering collaboration. However, if not implemented carefully, it may lead to disparities where wealthier nations benefit more than developing countries. Thus, for emissions trading to support global climate efforts effectively, it needs to be accompanied by equity considerations and support for nations with fewer resources.

Related terms

Cap-and-Trade: A system where a limit (cap) is set on emissions and companies can trade allowances to stay under this cap, encouraging cost-effective reductions.

Carbon Credits: Permits that represent the right to emit one metric ton of carbon dioxide or equivalent greenhouse gases, used in emissions trading schemes.

Kyoto Protocol:

An international treaty that commits its parties to reduce greenhouse gas emissions, which established mechanisms like emissions trading.