In very basic terms, emissions trading is a mechanism in which the government provides incentives to control pollution. Emissions trading is often referred to as ‘cap-and-trade’ and focuses on reducing pollution through a market-based approach, whereby a cap (or limit) on emissions is set, and permits are subsequently created up to the level of this particular cap.
These permits are referred to as ‘tradable pollution permits’ and the main aim of such a mechanism is to add the profit motive as an incentive for good performance. This is effectively putting a price on pollution, while also creating flexibility when it comes to how and where pollution is reduced.
Furthermore, by setting such an allowance, it ensures that the environmental goal is met and that the tradable allowances provide increased flexibility for individual emissions sources to set their own mechanisms. These allowances can be bought and sold in an allowance market, and, therefore, emissions trading is seen as a market-based approach. By setting a limit on allowances, this creates scarcity, which in turn, generates economic value, providing an incentive to reduce emissions.
When discussing the concept of emissions trading, it is vital to mention a number of advantages related to this scheme.
Due to the overall pollution limit which is established, there is a certain level of environmental certainty which comes about, ensuring that progress will be effective in this regard.
Additionally, due to the incentives for efficiency and innovation, implementation costs are lowered. As regards developing a compliance strategy, there is flexibility for individual emissions sources when it comes to ensuring compliance.
The EU’s Emissions Trading System (ETS) was launched in 2005 as a major pillar of the EU’s climate policy and is renowned as being the world’s largest scheme for trading greenhouse gas emission allowances. Companies must provide measurements and reports with regards to their carbon emissions, and to provide one allowance for every tonne they release; companies can also trade these allowances, incentivising them to reduce their emissions. The EU ETS has proven to be a successful scheme. It has capped half of Europe’s carbon emissions and the companies following the scheme are no longer free to pollute. Following a study carried out, it was concluded that between 2005 and 2007, the ETS reduced emissions by approximately 210 million tonnes across Europe.
The companies in the scheme are no longer free to pollute
Emissions trading systems are highly cost-effective, whereby trade encourages markets to find the cheapest ways to reduce emissions. The EU ETS put a price on carbon, whereby a financial value was allocated to each tonne of emissions saved and this also worked towards the promotion of investment in clean, low-carbon technologies.
The EU ETS also provides a solid platform for eventually developing an international carbon market. China, South Korea, Canada, Japan, New Zealand, Switzerland and the US already have a number of national or regional systems, however the international carbon market is said to develop through a bottom-up approach, whereby the EU ETS will be linked with other international systems, with a common aim to reduce the amount of emissions. The EU ETS currently operates in 28 European countries, together with Iceland, Liechtenstein and Norway, and covers approximately 45 per cent of the EU’s greenhouse gas emissions.
The EU ETS consists of four distinct trading periods, whereby development is carried out in stages. The first trading period was between 2005 and 2007, which constituted a learning process and established the system as one of the largest in the carbon market.
Following this, the second period was between 2008 and 2012, where the system saw the addition of three new countries, Iceland, Norway and Liechtenstein. We are presently in the third trading period, that is between 2013 and 2020, whereby a progressive shift towards the auctioning of allowances in place of cost-free allocation was prominent.
The final trading period between 2021 and 2030, where the EU ETS will be revised, as evident through a legislative proposal which was presented by the European Commission back in 2015.
The EU ETS is definitely still considered as being a highly-relevant system, whereby the system is now in its third phase, bring about a number of changes.
Some of the central changes include the introduction of a single, EU-wide cap on emissions which replaces the previous system of national caps, together with the auctioning method for allocating allowances, which replaces the previous system of free allocation.
Apart from this, a set of unified allocation rules now apply to the allowances which are still given away for free. This phase also saw the inclusion of more sectors and gases, together with another addition to the system, when Croatia joined in 2013.
Nina Fauser is a fourth year LL.B (Hons.). student