Emissions trading systems

Definition

Emissions trading systems (ETS) are market-based approaches designed to reduce greenhouse gas emissions by allowing countries or companies to buy and sell permits to emit a certain amount of carbon dioxide or other pollutants. This system creates a financial incentive for polluters to reduce their emissions; those who can cut emissions at a lower cost can sell their excess permits to others who face higher costs, leading to a more efficient overall reduction in emissions.

5 Must Know Facts For Your Next Test

1. Emissions trading systems have been implemented in various regions worldwide, with the European Union Emissions Trading System (EU ETS) being the largest and most established.
2. By creating a financial market for emissions allowances, ETS can drive innovation and investments in cleaner technologies as companies seek to lower their overall emissions costs.
3. The effectiveness of emissions trading systems depends on accurately measuring emissions, enforcing compliance, and ensuring that caps are stringent enough to promote real reductions.
4. In addition to reducing emissions, ETS can help generate revenue for governments, which can be reinvested into renewable energy projects or climate adaptation measures.
5. Critics of emissions trading systems argue that they can lead to market volatility and may not always result in significant emission reductions if caps are set too leniently.

Review Questions

• How do emissions trading systems promote efficiency in reducing greenhouse gas emissions?
  • Emissions trading systems promote efficiency by allowing companies that can reduce emissions at a lower cost to sell their excess allowances to those facing higher reduction costs. This market-based approach enables resources to be allocated more effectively, leading to an overall reduction in greenhouse gases while minimizing economic impact. The flexibility inherent in this system encourages innovation and cost-effective solutions, making it easier for industries to meet their environmental goals.
• Discuss the potential challenges and criticisms associated with implementing an emissions trading system.
  • Challenges related to emissions trading systems include ensuring accurate measurement and reporting of emissions, the need for strong regulatory frameworks, and potential market volatility. Critics argue that if caps are set too high, it may lead to insufficient emission reductions, undermining the system's goals. Additionally, there are concerns about the fairness of allowing companies to buy their way out of emission reductions instead of making necessary changes to their operations.
• Evaluate the role of emissions trading systems in international climate change agreements and their impact on global efforts to combat climate change.
  • Emissions trading systems play a significant role in international climate change agreements by providing countries with flexible mechanisms to meet their greenhouse gas reduction targets. By allowing for the buying and selling of emission permits across borders, these systems encourage cooperation among nations and create financial incentives for reducing overall global emissions. However, the success of these systems relies heavily on robust international cooperation, compliance mechanisms, and commitments to ambitious targets, as inconsistencies in implementation could hinder collective climate efforts.

Related terms

Cap-and-Trade:

A regulatory system where a limit (cap) is set on emissions, and businesses can trade allowances under that cap to incentivize reductions in emissions.

Carbon Credits: Permits that represent the right to emit one ton of carbon dioxide or the equivalent amount of a different greenhouse gas, which can be bought and sold in an emissions trading system.

Greenhouse Gas Emissions: Gases that trap heat in the atmosphere, contributing to global warming; major examples include carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O).