Emissions trading system

Definition

An emissions trading system (ETS) is a market-based approach to controlling pollution by providing economic incentives for reducing the emissions of pollutants. It allows companies or organizations to buy and sell allowances for their greenhouse gas emissions, creating a financial incentive to decrease emissions and invest in cleaner technologies. This system helps to measure and monitor environmental impact by setting a cap on total emissions and encouraging innovation through market mechanisms.

5 Must Know Facts For Your Next Test

1. An emissions trading system operates on the principle of supply and demand, where the price of emissions allowances fluctuates based on market conditions.
2. The ETS is often implemented by governments or international bodies aiming to meet climate goals or commitments under agreements such as the Paris Agreement.
3. Emissions trading systems can lead to significant cost savings for businesses by allowing them to choose the most cost-effective way to reduce emissions, whether through technology upgrades or purchasing credits.
4. The effectiveness of an ETS depends on strict monitoring and reporting requirements to ensure that emissions are accurately measured and reported.
5. Critics of emissions trading systems argue that they can lead to 'hot spots' where pollution is concentrated in specific areas, as companies may choose cheaper compliance options rather than making substantive emissions reductions.

Review Questions

• How does an emissions trading system incentivize companies to reduce their greenhouse gas emissions?
  • An emissions trading system incentivizes companies to reduce their greenhouse gas emissions by creating a financial market for emissions allowances. Companies are allocated a certain number of allowances that represent the maximum amount of pollutants they can emit. If they reduce their emissions below this limit, they can sell their excess allowances on the market for profit. This encourages companies to innovate and adopt cleaner technologies in order to minimize their costs.
• Discuss the potential benefits and drawbacks of implementing an emissions trading system in addressing climate change.
  • Implementing an emissions trading system can offer several benefits, such as promoting cost-effective emission reductions and encouraging technological advancements. However, drawbacks may include the risk of market manipulation, the creation of pollution hotspots, and potential inequities among businesses that may struggle to adapt. Additionally, without stringent monitoring, there may be challenges in ensuring actual reductions occur, which could undermine the system's effectiveness in tackling climate change.
• Evaluate the impact of an effective emissions trading system on global greenhouse gas reduction efforts and its role in achieving international climate agreements.
  • An effective emissions trading system can significantly enhance global greenhouse gas reduction efforts by providing a flexible mechanism for countries and businesses to meet their emission reduction targets. By establishing a market for carbon credits, it promotes investment in cleaner technologies and practices, contributing to broader goals like those set in international climate agreements such as the Paris Agreement. Furthermore, successful implementation of an ETS could serve as a model for other nations seeking to balance economic growth with environmental sustainability, thereby amplifying its impact on global climate action.

Related terms

Carbon Credit: A carbon credit represents one metric ton of carbon dioxide emissions that has been reduced, avoided, or sequestered. These credits can be traded in an emissions trading system.

Cap-and-Trade: A cap-and-trade program sets a maximum limit on emissions (the cap) and allows companies to trade emissions allowances, promoting cost-effective reductions in greenhouse gases.

Greenhouse Gases: Greenhouse gases are gases in Earth's atmosphere that trap heat, contributing to global warming and climate change. Common examples include carbon dioxide, methane, and nitrous oxide.