Emissions Trading

Emissions Trading

Emissions trading is a market-based approach to controlling pollution by providing economic incentives for reducing the emissions of pollutants. In an emissions trading system, a central authority (usually a governmental body) sets a limit or cap on the amount of a pollutant that can be emitted. The limit or cap is allocated or sold to firms in the form of emissions permits which represent the right to emit or discharge a specific volume of the specified pollutant. Firms are required to hold a number of permits (or carbon credits) equivalent to their emissions. The total number of permits cannot exceed the cap, limiting total emissions to that level. Firms that need to increase their volume of emissions must buy permits from those who require fewer permits. The transfer of permits 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. Thus, in theory, those who can reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest cost to society.

Carbon trading, carbon tax, greenhouse gases, Kyoto Protocol, Paris Agreement, cap and trade

— Robert Anderson