An emissions trading market sets limits on harmful emissions and creates a financial incentive for environmentally conscious practices. Parties that exceed limits must purchase credits from those who have earned them, creating a trade market that rewards emission-friendly production techniques.
The emissions trading market is a term for the market created by environmental initiatives to ensure that environmentally harmful emissions, such as carbon dioxide, are kept to a minimum. To achieve this objective, which can be carried out at the national level or, as in the case of the Kyoko Protocol, at the international level, levels must be established for the acceptable amount of emissions in terms of environmental effect. Any party participating in this type of program that exceeds the limits must purchase permits from parties that have exceeded the required number and earned credit for their efforts. In this way, an emissions trading market is created for these credits.
Environmental concerns often clash with the production efforts of large corporations. These problems can often play out internationally as well, considering that large, developed countries, due to their enormous amount of consumption, are among the worst polluters in the world. While regulations can be effective in reducing such practices, they provide no incentive for environmentally conscious parties other than that they will not be penalized. An emissions trading market provides financial motivation so that everyone involved can find the best practices for conducting business in an environmentally responsible manner.
Establishing an emissions trading market requires some governing body to set limits on the amount of potentially harmful emissions a company or country can produce. This occurred internationally with the Kyoto Protocol, which requires all adherents to stay within certain emission limits. The total amount of acceptable emissions is divided into units.
Once this process is complete, it is up to the parties involved in an emissions trading market to try to stay below predetermined standards. If they fall below the emissions limits, they will earn credits based on these practices. Parties that exceed the limits must purchase credits for the right to do so. Since this is the case, parties with credits will sell them to parties that need them, thus creating a trade market.
As with any other financial market, an emissions trading market works according to the laws of supply and demand. If there are an excessive number of environmental criminals, parties that own credits will find them valuable because of their scarcity. In this way, countries and companies in the market that have developed emission-friendly production techniques will be rewarded for their efforts. Those who exceed the limit will also be financially motivated to improve their performance. When this happens, the environment benefits in the long run.
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