Emissions trading schemes

Definition

Emissions trading schemes (ETS) are market-based approaches designed to reduce greenhouse gas emissions by providing economic incentives for companies to lower their pollution output. Under these schemes, governments set a cap on total emissions and allocate or sell emissions allowances to companies, allowing them to trade these allowances based on their needs. This creates a financial motivation for companies to innovate and invest in cleaner technologies, thus contributing to the reduction of air pollution and its related impacts.

5 Must Know Facts For Your Next Test

1. Emissions trading schemes are used in various regions around the world, including the European Union's Emissions Trading System (EU ETS), which is one of the largest and most established systems.
2. Companies that reduce their emissions below their allocated allowances can sell their surplus credits, providing a financial incentive to invest in cleaner technologies.
3. ETS aims to create a flexible approach to achieving emission reduction targets, allowing companies to choose how best to comply with regulations based on their specific circumstances.
4. By setting a price on carbon through trading, emissions trading schemes encourage businesses to consider the environmental costs of their operations when making decisions.
5. Critics of emissions trading schemes argue that they can lead to market manipulation and may not always result in significant overall emission reductions if not properly regulated.

Review Questions

• How do emissions trading schemes create economic incentives for companies to reduce their greenhouse gas emissions?
  • Emissions trading schemes create economic incentives by allowing companies to trade emissions allowances in a market environment. When a company reduces its emissions below its allocated allowance, it can sell its surplus credits to other companies that need them, effectively turning pollution reduction into a potential revenue stream. This financial motivation encourages businesses to invest in cleaner technologies and adopt practices that lower their overall emissions.
• Discuss the advantages and disadvantages of implementing an emissions trading scheme compared to traditional regulatory approaches to pollution control.
  • One advantage of emissions trading schemes is their flexibility; companies can choose how they meet their emission reduction targets, whether through investing in new technologies or purchasing allowances. This market-driven approach can stimulate innovation and cost-effective solutions. However, disadvantages include potential market manipulation and the complexity of managing such systems. If not designed carefully, an ETS may fail to achieve substantial emission reductions or could allow certain companies to continue polluting without significant penalties.
• Evaluate the effectiveness of emissions trading schemes in reducing air pollution and contributing to climate change mitigation efforts globally.
  • Emissions trading schemes have shown varying levels of effectiveness in reducing air pollution and mitigating climate change. For instance, the EU ETS has led to measurable reductions in carbon dioxide emissions since its inception, demonstrating the potential of market-based approaches. However, the overall success often hinges on stringent regulations, proper monitoring, and enforcement mechanisms. As countries implement more ambitious climate targets, refining these systems will be crucial in ensuring they deliver real environmental benefits while balancing economic growth.

Related terms

Carbon Credit: A carbon credit represents one ton of carbon dioxide emissions that has been reduced or removed from the atmosphere, allowing companies to buy and sell these credits as part of an emissions trading scheme.

Cap-and-Trade: A regulatory system that sets a limit (cap) on emissions and allows companies with low emissions to sell their excess allowances to larger polluters, effectively creating a tradeable market for emissions reductions.

Greenhouse Gases: Gases that trap heat in the atmosphere, contributing to climate change; common examples include carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O).