Emissions trading involves a government setting a global carbon emissions ceiling, with companies buying permits to emit a certain amount of carbon. Companies can buy extra permits if they exceed their limit, giving them flexibility to meet reduction targets. The plan is called cap and trade and can grant permits for free, auction them or sell them upfront with a dividend. Emissions trading has had mixed results in the past, but it is favored by some as the simplest way to reduce carbon emissions.
Emissions trading is a feature of some plans to reduce carbon dioxide emissions, usually from industrial sources such as factories or power plants. As part of this plan, a government or group of governments determines a globally acceptable level of carbon emissions, called a ceiling. Companies then pay for the right to emit a certain amount of carbon dioxide by purchasing or receiving emission permits. Emissions trading occurs when a company produces more carbon than its permit permits. In that case, that company could buy permits, or credits, from another company that emits less carbon dioxide than it allows.
The flexibility for individual companies to emit more carbon than initially allowed is therefore a feature of emissions trading. This could give established companies a number of years to meet emissions reduction targets, while purchasing additional permits in the process. It could also give some companies the incentive to make more drastic cuts in emissions to profit from the sale of extra permits. Some companies may also prefer the flexibility of emissions trading to stricter regulations or taxes on carbon emissions. Some proponents of emissions trading are also drawn to its basis in free-market principles.
The predetermined carbon cap and trading of carbon credits has led to such a plan being called a cap and trade. Such a scheme is favored by some in favor of reducing carbon emissions because it seems to them the simplest way to reduce the carbon emissions of an entire state or country. Unlike other regulatory options, emissions trading sets carbon quotas at some point that would be known to companies and would allow governments to reduce emissions over time. Annual reductions in carbon emissions could be achieved by lowering the cap each year.
There are usually three options for determining how companies would receive their initial emission permits. One would be to grant permits for free at the start of any emissions trading programme. Another would be to auction the permits, where the proceeds from the issues would be returned to the government. A third option would also sell the permits upfront, but would return a dividend to consumers or taxpayers to offset the price increases caused by the permit sale.
Emissions trading has been attempted in the past with mixed results. In the 1980s and 1990s, the US government capped sulfur dioxide emissions and sold permits that allowed power plants to emit it. The result was a significant decrease in those emissions, which were causing widespread acid rain in the northeastern United States. In 2005, the European Union started an emissions trading program by giving away permits for free. The early results of that program led many to initially call it a failure.
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