Emissions trading

Definition

Emissions trading, also known as cap-and-trade, is an environmental policy tool that allows countries or companies to buy and sell allowances for greenhouse gas emissions. The overall goal is to reduce emissions by capping the total amount allowed and allowing flexibility in how reductions are achieved, promoting economic efficiency and innovation in achieving environmental goals.

5 Must Know Facts For Your Next Test

1. Emissions trading systems are designed to incentivize companies to reduce their emissions in the most cost-effective way by allowing them to trade surplus allowances.
2. The European Union Emissions Trading System (EU ETS) is one of the largest and most established emissions trading systems in the world, covering various sectors including power and manufacturing.
3. By setting a declining cap on emissions over time, emissions trading encourages long-term investment in cleaner technologies.
4. Critics of emissions trading argue that it can lead to 'carbon leakage,' where companies move operations to countries with less stringent regulations.
5. Successful emissions trading systems require robust monitoring and reporting mechanisms to ensure transparency and accountability.

Review Questions

• How does emissions trading promote flexibility in achieving emissions reductions compared to traditional regulatory approaches?
  • Emissions trading promotes flexibility by allowing entities the option to buy or sell emission allowances rather than mandating specific reductions across the board. This market-driven approach means companies can assess their own costs of reducing emissions and choose the most efficient methods. Consequently, firms that can lower their emissions at a lower cost will do so and sell their excess allowances to those facing higher costs, ensuring that overall emission targets are met more efficiently.
• Evaluate the effectiveness of the European Union Emissions Trading System in reducing greenhouse gas emissions since its inception.
  • The European Union Emissions Trading System has been effective in reducing greenhouse gas emissions, having led to a significant decrease of around 30% from 2005 levels by 2020. Its design allows for a gradual tightening of caps, driving innovation and investment in cleaner technologies among participating industries. However, it has faced challenges such as surplus allowances leading to lower prices and questions about its impact on competitiveness in global markets. Addressing these challenges has been crucial for ensuring long-term effectiveness.
• Assess the implications of emissions trading on global climate diplomacy efforts and international agreements aimed at reducing greenhouse gas emissions.
  • Emissions trading has significant implications for global climate diplomacy as it provides a flexible mechanism for countries to meet their emission reduction commitments under international agreements like the Paris Accord. By facilitating financial flows from developed to developing countries through carbon credits, it can enhance cooperation on climate change. However, disparities in regulatory standards and concerns about fairness and equity among nations may complicate negotiations. Successfully integrating emissions trading into broader climate strategies is essential for achieving global targets.

Related terms

Carbon credits: Permits that represent the right to emit one ton of carbon dioxide or its equivalent in other greenhouse gases, which can be bought or sold in carbon markets.

Cap-and-trade system: A market-based approach to controlling pollution by providing economic incentives for reducing emissions, with a limit or cap on total emissions.

Greenhouse gases: Gases that trap heat in the atmosphere, including carbon dioxide, methane, and nitrous oxide, contributing to climate change.