Carbon emissions trading

Definition

Carbon emissions trading is an environmental policy tool that allows companies to buy and sell allowances for greenhouse gas emissions, effectively creating a market for carbon dioxide and other pollutants. This system is designed to incentivize reductions in emissions by allowing companies that can reduce their emissions at a lower cost to sell their extra allowances to companies facing higher costs of reduction. By linking financial incentives to emission reductions, carbon emissions trading aims to address climate change in a more cost-effective manner.

5 Must Know Facts For Your Next Test

1. The concept of carbon emissions trading gained international recognition with the Kyoto Protocol in 1997, which established legally binding commitments for developed countries to reduce their greenhouse gas emissions.
2. In a carbon trading system, each allowance typically represents one ton of CO2 emissions, and companies must hold enough allowances to cover their emissions over a specific period.
3. The European Union Emissions Trading System (EU ETS) is one of the largest and most well-known carbon trading schemes globally, covering multiple industries and promoting significant emission reductions since its inception in 2005.
4. Carbon emissions trading can lead to economic efficiency as it allows the market to find the most cost-effective ways to achieve emission reduction targets rather than mandating specific technologies or methods.
5. Critics argue that carbon trading can create loopholes that allow companies to continue high levels of emissions without making substantial changes, leading to calls for stricter regulations and oversight.

Review Questions

• How does carbon emissions trading create financial incentives for companies to reduce their greenhouse gas emissions?
  • Carbon emissions trading creates financial incentives by allowing companies that reduce their emissions below a set limit to sell their excess allowances to other companies that find it more costly to reduce their own emissions. This creates a market-driven approach where companies have the flexibility to manage their emissions while still meeting regulatory requirements. By enabling companies to profit from their successful reductions, the system encourages innovation and investment in cleaner technologies.
• Discuss the impact of the Kyoto Protocol on the development of carbon emissions trading as an international policy tool.
  • The Kyoto Protocol significantly impacted the development of carbon emissions trading by establishing legally binding emission reduction commitments for developed countries and introducing mechanisms like cap-and-trade. It encouraged countries to implement market-based solutions to meet their targets effectively. This led to the establishment of various trading systems around the world, including regional programs such as the EU ETS, which showcased how emissions trading could operate on an international scale and provided a framework for further climate negotiations.
• Evaluate the strengths and weaknesses of carbon emissions trading as a strategy for combating climate change in the context of international negotiations.
  • Carbon emissions trading has several strengths, including promoting cost-effective emission reductions and fostering innovation through market mechanisms. However, its weaknesses include potential loopholes that may allow companies to bypass meaningful reductions and concerns over fairness, as wealthier companies can sometimes buy their way out of compliance. In international negotiations, these strengths and weaknesses need careful consideration, as countries aim for equitable solutions that balance economic growth with environmental responsibility while ensuring effective implementation and enforcement of emission reduction commitments.

Related terms

Cap-and-Trade: A market-based approach to controlling pollution by providing economic incentives for reducing emissions. Under this system, a limit (cap) is set on the total level of greenhouse gas emissions, and companies are issued allowances that they can trade.

Carbon Offset: A reduction in greenhouse gas emissions, such as planting trees or investing in renewable energy, used to compensate for emissions produced elsewhere.

Emissions Reduction Commitment: A legally binding target for countries or organizations to reduce their greenhouse gas emissions, often set under international agreements.