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Emissions trading (or emission trading) is an
administrative approach used to control
pollution by providing
economic
incentives for achieving reductions in the emissions of
pollutants. It is sometimes called cap and trade.
A central authority (usually a
government or international body) sets a limit or cap
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 allowances (or
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 emission allowance 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. Thus, in theory, those who can easily reduce
emissions most cheaply will do so, achieving the pollution
reduction at the lowest possible cost to society.[1]
There are active trading programs in several pollutants. For
greenhouse gases the largest is the
European Union Emission Trading Scheme.[2]
In the United States there is a national market to reduce
acid rain and several regional markets in nitrogen oxides.[3]
Markets for other pollutants tend to be smaller and more
localized.
The overall goal of an emissions trading plan is to reduce
emissions. The cap is usually lowered over time - aiming towards
a national emissions reduction target.[4]
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.[5]
Corporations can also prematurely retire allowances by donating
them to a nonprofit entity and then be eligible for a tax
deduction.
Overview
Because emissions trading uses
markets to determine how to deal with the problem of
pollution, it is often touted as an example of effective
free market environmentalism. However, emissions trading
requires a cap to effectively reduce emissions, and the cap is a
government regulatory mechanism, so it is somewhat of a misnomer
to describe it as "free market" environmentalism. The entire
procedure is premised on government intervention in the form of
a cap. After a cap has been set by a government political
process, individual companies are free to choose how or if they
will reduce their emissions. Failure to reduce emissions is
often punishable by a further government regulatory mechanism, a
fine that increases costs of production. In theory, firms will
choose the least-costly way to comply with the pollution
regulation, which will lead to reductions where the least
expensive solutions exist, while allowing emissions that are
more expensive to reduce.
Cap and trade versus baseline and credit
The textbook emissions trading program can be called a "cap
and 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 and credit program.[18]
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. Many
of the criticisms of trading in general are targeted at baseline
and credit programs rather than cap type programs.
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Wikipedia
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