Emissions trading

Definition

Emissions trading, also known as cap-and-trade, is a market-based approach used to control pollution by providing economic incentives for reducing emissions of pollutants. It allows companies or countries with low emissions to sell their extra allowances to larger emitters, thus encouraging overall reductions in emissions. This system creates a financial motivation for reducing greenhouse gas emissions, linking economic activity with environmental responsibility and directly addressing climate change and environmental risks.

5 Must Know Facts For Your Next Test

1. Emissions trading systems are designed to reduce overall greenhouse gas emissions by establishing a market for trading emission allowances.
2. The first large-scale emissions trading program was implemented in the United States in 1990 to control sulfur dioxide emissions from power plants.
3. Companies that reduce their emissions below their allowance can sell their excess credits, creating a financial incentive for innovation in cleaner technologies.
4. International agreements, such as the Kyoto Protocol, have encouraged the implementation of emissions trading systems as part of global efforts to combat climate change.
5. The effectiveness of emissions trading can be influenced by factors such as market demand for credits, regulatory frameworks, and overall economic conditions.

Review Questions

• How does emissions trading promote environmentally responsible behavior among companies?
  • Emissions trading promotes environmentally responsible behavior by creating a financial incentive for companies to reduce their greenhouse gas emissions. By allowing companies that emit less than their allocated allowance to sell their surplus credits, it encourages investment in cleaner technologies and operational efficiencies. As a result, companies are motivated not only to comply with regulations but also to improve their sustainability practices and reduce their overall environmental impact.
• Evaluate the impact of international agreements like the Kyoto Protocol on the adoption of emissions trading systems globally.
  • International agreements like the Kyoto Protocol have significantly influenced the adoption of emissions trading systems worldwide by establishing legally binding targets for greenhouse gas reductions. These agreements encourage countries to implement market-based solutions like emissions trading to meet their obligations. As nations seek cost-effective ways to achieve emission reduction targets, they often adopt such systems, leading to increased participation and collaboration in global efforts to combat climate change.
• Assess the long-term implications of emissions trading on global climate change strategies and economic growth.
  • The long-term implications of emissions trading on global climate change strategies and economic growth can be substantial. By integrating economic mechanisms into environmental policy, emissions trading encourages investment in green technologies and sustainable practices, potentially leading to innovation and job creation in emerging sectors. Additionally, as countries commit to reducing emissions through these systems, there may be a shift toward a low-carbon economy, helping mitigate climate change impacts while still fostering economic development. However, careful monitoring and regulatory adjustments will be necessary to ensure that these systems remain effective and equitable over time.

Related terms

Carbon Credit: A permit that allows the holder to emit a certain amount of carbon dioxide or other greenhouse gases; one carbon credit typically equals one ton of CO2.

Cap-and-Trade System: A regulatory system where a limit (cap) is set on total emissions, and companies can buy and sell allowances to stay within that cap.

Greenhouse Gases: Gases that trap heat in the atmosphere, contributing to the greenhouse effect; major examples include carbon dioxide, methane, and nitrous oxide.