Emissions Trading Systems

Definition

Emissions trading systems (ETS) are market-based approaches 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, creating a financial motive to decrease emissions. By capping total emissions and allowing the trading of allowances, ETS encourages cost-effective emission reductions and fosters innovation in cleaner technologies.

5 Must Know Facts For Your Next Test

1. The European Union Emissions Trading System (EU ETS) is the largest and most established emissions trading system in the world, launched in 2005.
2. ETS can lead to overall reductions in greenhouse gas emissions while providing flexibility for companies to meet their reduction targets in a cost-effective manner.
3. Emissions trading systems are often linked across borders, allowing for greater market efficiency and reducing costs associated with compliance.
4. The effectiveness of an ETS largely depends on the strictness of the cap set on emissions; a tighter cap can lead to more significant reductions.
5. Market volatility can impact the price of carbon allowances, influencing investment decisions in cleaner technologies and renewable energy.

Review Questions

• How do emissions trading systems incentivize companies to reduce their greenhouse gas emissions?
  • Emissions trading systems create a financial incentive for companies to reduce their greenhouse gas emissions by allowing them to trade allowances. Companies that reduce their emissions below their allocated allowances can sell their excess permits to other companies that may need them. This market mechanism encourages businesses to find cost-effective ways to lower their emissions, as they can profit from selling unused allowances, driving innovation and investments in cleaner technologies.
• Discuss the challenges faced by emissions trading systems in achieving their environmental goals.
  • Emissions trading systems face several challenges that can hinder their effectiveness in achieving environmental goals. One significant challenge is setting an appropriate cap on emissions; if the cap is too lenient, it may not drive sufficient reductions. Additionally, market volatility can create uncertainty for businesses, affecting their long-term investment decisions. The potential for loopholes and market manipulation also poses risks, as companies may exploit these weaknesses instead of genuinely reducing their emissions.
• Evaluate the impact of linking different emissions trading systems on global efforts to combat climate change.
  • Linking different emissions trading systems can significantly enhance global efforts to combat climate change by increasing market efficiency and enabling broader participation in carbon markets. This interconnectedness allows for more flexible compliance options and potentially lowers costs for participants by creating a larger pool of allowances to trade. However, it also requires harmonization of regulatory frameworks and standards across jurisdictions, which can be complex. Ultimately, linked systems have the potential to drive more substantial greenhouse gas reductions on a global scale while fostering international cooperation on climate policy.

Related terms

Cap-and-Trade: A regulatory system that sets a limit (cap) on emissions and allows entities to trade allowances within that cap, incentivizing lower emissions.

Carbon Credits: Permits that represent the right to emit one metric ton of carbon dioxide or equivalent greenhouse gases, which can be bought or sold in emissions trading markets.

Carbon Market: A marketplace where carbon credits are traded, allowing businesses to buy and sell their emission allowances to meet regulatory requirements.