Deutsch: Emissionshandel / Español: Comercio de emisiones / Português: Comércio de emissões / Français: Échange de quotas d'émission / Italiano: Commercio di emissioni

Emissions trading, also known as cap-and-trade, is a market-based approach to controlling pollution by providing economic incentives for reducing greenhouse gas emissions. In the environmental context, it allows companies or governments to buy and sell emission allowances, encouraging them to cut emissions to meet environmental goals. This system is used to combat climate change by capping the total amount of emissions allowed, while enabling flexibility for entities to trade their emissions quotas.

Description

Emissions trading is an environmental policy tool designed to reduce the amount of greenhouse gases (GHGs) released into the atmosphere, particularly carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O). The basic idea is to set a cap on the total emissions allowed within a region or sector. This cap is divided into emission allowances, which are distributed to companies or other entities that are responsible for emissions, such as power plants, manufacturing facilities, or airlines.

Each allowance typically permits the holder to emit a specific amount of GHGs, often measured in tonnes of CO2 equivalent. If a company emits less than its allotted quota, it can sell the excess allowances to other companies. Conversely, if a company expects to exceed its emissions limit, it can purchase additional allowances from the market. This creates a carbon market where the price of emissions is determined by supply and demand for allowances.

The cap ensures that overall emissions stay within a predefined limit, while trading offers flexibility and cost-effectiveness. Companies that can reduce emissions at a lower cost do so and sell their excess allowances, while companies that find it more expensive to reduce emissions can buy allowances instead of implementing costly reductions. Over time, the cap is usually lowered, which gradually reduces total emissions and encourages companies to adopt cleaner technologies.

Emissions trading systems (ETS) are part of broader climate change mitigation strategies and are used in various regions worldwide. The European Union Emissions Trading System (EU ETS) is the largest and most established program, covering sectors such as energy production, heavy industry, and aviation. Other systems exist in regions like California (USA), South Korea, and China, with some countries exploring linking their ETS programs to create a more extensive global market for carbon emissions.

The primary goal of emissions trading is to provide an economic mechanism that drives innovation and investments in cleaner technologies, ultimately reducing GHG emissions and mitigating climate change. In contrast to traditional regulations, which impose uniform limits on all emitters, emissions trading offers flexibility and incentives for cost-effective reductions.

Application Areas

• Power Generation: Power plants, particularly those that rely on fossil fuels like coal and natural gas, participate in emissions trading systems to reduce their carbon footprint and invest in cleaner energy sources such as wind or solar.
• Heavy Industry: Industries like steel, cement, and chemical production are energy-intensive and significant contributors to carbon emissions. Through emissions trading, they can balance their emissions by purchasing allowances or investing in emissions-reducing technologies.
• Transportation and Aviation: In regions like the EU, airlines are required to participate in emissions trading systems to offset the carbon emissions from flights. This encourages investment in fuel-efficient aircraft or carbon offsets such as tree-planting initiatives.
• International Climate Agreements: Emissions trading is a key tool used by countries to meet their emissions reduction targets under global agreements like the Paris Agreement. Countries can trade carbon credits with one another to achieve their national climate goals.
• Carbon Offsetting: Companies that want to reduce their carbon footprint but cannot do so immediately can purchase carbon credits generated by environmental projects, such as reforestation or renewable energy projects, to offset their emissions.

Well-Known Examples

• European Union Emissions Trading System (EU ETS): Established in 2005, the EU ETS is the world’s largest and most established emissions trading market. It covers over 11,000 power plants, factories, and airlines, with the goal of reducing emissions by 55% by 2030 compared to 1990 levels.
• California Cap-and-Trade Program (USA): This system, launched in 2013, aims to reduce California's GHG emissions to 40% below 1990 levels by 2030. It covers major polluters, including power plants, refineries, and industrial sectors.
• China’s National Carbon Market: Launched in 2021, China’s ETS is the world’s largest in terms of emissions covered, targeting the power generation sector initially. This is a major part of China’s goal to peak emissions by 2030 and reach carbon neutrality by 2060.
• Kyoto Protocol’s Clean Development Mechanism (CDM): A mechanism that allows countries with emission-reduction commitments to buy carbon credits from projects in developing countries that reduce emissions.

Treatment and Risks

While emissions trading is an innovative approach to managing GHG emissions, it comes with certain risks and challenges. One of the primary risks is the potential for market volatility. If the price of carbon allowances drops too low, it can diminish the incentive for companies to invest in emission reductions, as it becomes cheaper to buy allowances than to reduce emissions. This can weaken the effectiveness of the system in driving down overall emissions.

Another challenge is carbon leakage, which occurs when companies relocate their operations to countries or regions with weaker environmental regulations to avoid the costs of emissions trading. This can lead to the shifting of emissions rather than their reduction.

There is also the issue of over-allocation of allowances. In some emissions trading systems, allowances have been over-allocated, meaning that the supply of emissions permits exceeds the demand. This creates a surplus that can depress the market price for carbon and reduce the overall effectiveness of the system. To address this, some systems have introduced mechanisms like the Market Stability Reserve (MSR), which adjusts the supply of allowances to maintain a more stable carbon price.

Lastly, environmental justice concerns arise when wealthier companies or countries are able to buy their way out of reducing emissions, leaving the environmental burden on vulnerable populations who are more affected by pollution and climate change. Critics argue that emissions trading can allow high-emitting companies to continue polluting, as long as they purchase allowances, instead of directly reducing their environmental impact.

Despite these challenges, emissions trading is considered one of the more cost-effective and flexible tools for reducing GHG emissions, especially when combined with other measures like carbon taxes and renewable energy incentives.

Similar Terms

• Carbon Market: The trading of carbon allowances or credits in systems designed to reduce GHG emissions. This can include both compliance markets (like ETS) and voluntary markets.
• Cap-and-Trade: A specific form of emissions trading where a cap is set on total emissions, and companies trade permits to stay within that cap.
• Carbon Pricing: A broader term for assigning a monetary Characteristic of the environmentthat is desired. In the past, the term 'environmental value' was defined to mean value to carbon emissions, either through emissions trading or carbon taxes, to incentivize reductions.
• Carbon Offset: A financial mechanism where companies or individuals compensate for their emissions by investing in projects that reduce or remove GHGs from the atmosphere.
• Carbon Tax: An alternative to emissions trading, where a direct tax is placed on the carbon content of fossil fuels, providing an economic incentive to reduce emissions.

Weblinks

• wind-lexikon.de: 'Emissionshandel' in the wind-lexikon.de (German)

Summary

Emissions trading, or cap-and-trade, is a market-based system designed to reduce greenhouse gas emissions by allowing companies to buy and sell emission allowances under a set cap. By creating a financial incentive to lower emissions, this approach helps combat climate change in a flexible and cost-effective way. However, challenges like market volatility, carbon leakage, and fairness concerns must be addressed to ensure the system’s success in achieving long-term sustainability goals.

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