Emissions Trading Systems

Definition

Emissions trading systems (ETS) are market-based approaches to controlling pollution by providing economic incentives for reducing emissions of pollutants. These systems allow companies to buy and sell emission allowances, creating a financial motivation to decrease emissions as they can profit from selling excess allowances. By setting a cap on total emissions and enabling flexibility in how reductions are achieved, ETS can encourage innovation and cost-effective solutions for mitigating climate change.

5 Must Know Facts For Your Next Test

1. The primary goal of emissions trading systems is to reduce overall greenhouse gas emissions while minimizing costs to businesses.
2. Companies that reduce their emissions below their allotted allowances can sell the surplus credits, providing a financial incentive for innovation and efficiency.
3. Many regions and countries have implemented ETS, including the European Union Emission Trading System (EU ETS), which is one of the largest and most established.
4. ETS can help achieve international climate goals by linking different trading systems, allowing for greater flexibility and cost-effectiveness in meeting emission reduction targets.
5. The effectiveness of an emissions trading system largely depends on the stringency of the cap set and the market's ability to respond to price signals.

Review Questions

• How does an emissions trading system create economic incentives for companies to reduce their greenhouse gas emissions?
  • An emissions trading system creates economic incentives by allowing companies to buy and sell emission allowances based on their actual emissions. When companies reduce their emissions below their allocated allowances, they can sell the excess credits on the market. This market-driven approach not only encourages companies to innovate and find cost-effective ways to cut emissions but also allows for flexible compliance, as firms can choose whether to reduce emissions or purchase additional allowances.
• Discuss the potential benefits and challenges of implementing an emissions trading system on a national scale.
  • Implementing an emissions trading system on a national scale can bring several benefits, including cost-effective reductions in greenhouse gas emissions and increased investment in clean technologies. However, challenges may arise, such as accurately measuring emissions, ensuring equitable distribution of allowances, and preventing market manipulation. Additionally, there can be political resistance from industries that may face higher costs or those skeptical about the effectiveness of such market mechanisms.
• Evaluate the role of emissions trading systems in achieving global climate goals and how they interact with international agreements like the Paris Agreement.
  • Emissions trading systems play a crucial role in achieving global climate goals by providing flexible mechanisms for countries and companies to meet their emission reduction targets. Under international agreements like the Paris Agreement, nations are encouraged to implement ETS as part of their commitments to lower greenhouse gas emissions. These systems facilitate cooperation between countries by enabling carbon markets that can link various national trading schemes, promoting investment in emission-reducing projects globally. Their success depends on effective regulation, transparent markets, and robust participation from stakeholders across sectors.

Related terms

Cap-and-Trade: A specific type of emissions trading system where a limit (cap) is set on total emissions, and companies can trade allowances that permit them to emit a certain amount.

Carbon Credit: A permit that allows the holder to emit one metric ton of carbon dioxide or an equivalent amount of another greenhouse gas.

Offsetting: A mechanism that allows companies to compensate for their emissions by investing in projects that reduce or sequester an equivalent amount of greenhouse gases elsewhere.