Emission Trading:
Emissions trading is an approach used to control pollution by providing economic
incentives for achieving reductions in the emissions of pollutants. It sets
a limit on the amount of a pollutant that can be emitted. Companies or other
groups are issued emission permits and are required to hold an equivalent
number of credits which represent the right to emit a specific amount. The
total amount of allowances and credits cannot exceed the cap, limiting total
emissions to that level. Companies that need to increase their emissions must
buy credits from those who pollute less. The transfer of allowances is referred
to as a trade. In effect, the buyer is paying a charge for polluting, while
the seller is being rewarded for having reduced emissions by more than was
needed.
Carbon trading is a better approach than a direct carbon tax or direct regulation.
The cap is usually lowered over time - aiming towards a national emissions
reduction target. In other systems a portion of all traded credits must be
retired, causing a net reduction in emissions each time a trade occurs. In
many cap and trade systems, organizations which do not pollute may also participate,
thus environmental groups can purchase and retire allowances or credits and
hence drive up the price of the remainder according to the law of demand.
Corporations can also prematurely retire allowances by donating them to a
nonprofit entity and then be eligible for a tax deduction.
Because emissions trading use markets to determine how to deal with the problem
of pollution, it is often touted as an example of effective free market environmentalism
The textbook emissions trading program can be called a "cap & trade"
approach in which an aggregate cap on all sources is established and these
sources are then allowed to trade amongst themselves to determine which sources
actually emit the total pollution load. An alternative approach with important
differences is a baseline & credit program. In a baseline and credit program
a set of polluters that are not under an aggregate cap can create credits
by reducing their emissions below a baseline level of emissions. These credits
can be purchased by polluters that do have a regulatory limit.
It's possible for a country to reduce emissions using a Command-Control approach,
such as regulation, direct and indirect taxes. But that approach is more costly
for some countries than for others.
Emissions trading refer to a system for in which parties can buy and sell
their carbon credits. It has been established in Europe and North America.
