Emissions trading schemes

Definition

Emissions trading schemes are market-based approaches designed to reduce greenhouse gas emissions by allowing companies to buy and sell allowances that permit them to emit a certain amount of pollution. This system creates a financial incentive for companies to lower their emissions, as those that exceed their limits can purchase allowances from others that have not used their full quota. The overall goal is to achieve environmental targets in a cost-effective manner while encouraging innovation in cleaner technologies.

5 Must Know Facts For Your Next Test

1. Emissions trading schemes are often implemented by governments or international bodies as part of broader climate change policies aimed at reducing overall greenhouse gas emissions.
2. The price of carbon credits in these schemes can fluctuate based on supply and demand, affecting how companies choose to manage their emissions.
3. Some of the largest emissions trading schemes operate in the European Union and California, where strict limits on emissions have been established.
4. These schemes encourage companies to invest in cleaner technologies and practices, as reducing emissions can save money on purchasing credits.
5. Critics argue that emissions trading schemes can lead to market manipulation and may not always achieve the intended environmental benefits if not properly regulated.

Review Questions

• How do emissions trading schemes create financial incentives for companies to reduce their greenhouse gas emissions?
  • Emissions trading schemes create financial incentives by allowing companies to buy and sell allowances for emitting greenhouse gases. If a company reduces its emissions below its allocated allowance, it can sell the surplus credits to other companies that may be struggling to meet their limits. This market mechanism encourages companies to innovate and adopt cleaner technologies, as they can profit from selling excess allowances.
• Discuss the potential advantages and disadvantages of implementing an emissions trading scheme as part of a national climate policy.
  • The advantages of implementing an emissions trading scheme include flexibility for businesses in how they meet emission reduction targets and the promotion of cost-effective solutions for reducing greenhouse gases. However, disadvantages may include potential market volatility, which can lead to uncertainty for businesses, and the risk of inequities where larger polluters may find it easier to buy credits instead of making substantial reductions. Effective regulation is essential to mitigate these issues.
• Evaluate the effectiveness of existing emissions trading schemes in achieving their environmental objectives, considering both successes and challenges faced.
  • Existing emissions trading schemes have had varying degrees of success in meeting environmental objectives. For instance, the European Union's Emission Trading System has significantly reduced emissions from power plants and industrial sectors since its inception. However, challenges such as oversupply of allowances have sometimes led to low carbon prices, reducing the incentive for further reductions. Evaluating these systems requires a close look at how well they adapt to changing economic conditions and whether they effectively drive long-term investment in cleaner technologies.

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, used as part of emissions trading schemes.

Cap-and-Trade: A regulatory system that sets a maximum limit (cap) on emissions, allowing companies to trade allowances within that limit, promoting cost-effective reductions in overall emissions.

Greenhouse Gas Emissions: Gases that trap heat in the atmosphere, such as carbon dioxide, methane, and nitrous oxide, contributing to climate change and global warming.