Emissions Trading - Definition

Within the context of greenhouse management ‘emissions trading’ refers to the trading of permits which allow emissions of set amounts of greenhouse gases.

How emissions trading works

The most common emissions’ trading system is based on the ‘cap and trade’ principle. This requires a cap being placed on the total amount of allowable emissions, the distribution of this total between polluters, and the creation of a marketplace where owners of the permits can trade with each other.

From an economic perspective, ‘cap and trade’ is considered to be an efficient system, as polluters who take steps to reduce their emissions are able to sell ‘spare’ emissions permits to polluters who produce more emissions than their initial permit allocation allows. Importantly the environmental outcome is not affected as the total amount of allowances allocated is fixed.

Emissions Trading Schemes in Operation:

EU Emissions Trading Scheme

The EU Emissions Trading Scheme (EU ETS) is the largest multinational emissions trading scheme in the world and was the first to be introduced, in 2005.

The scheme is a core part of the EU’s strategy to reduce greenhouse gas emissions. It covers the most heavily polluting industries in Europe, including the power sector and energy-intensive industrial sectors and accounts for approximately 45% of European emissions.

Each European member state is required to set an emission cap for all installations covered by the Scheme. Installations are allocated allowances for a particular commitment period. The number of allowances allocated to each installation for any given period is set down in the country’s National Allocation Plan.

Phase I of the Scheme began on 1 January 2005 and runs until 31 December 2007. This phase has been heavily criticised as excessive permits were issued meaning participating companies had little incentives to reduce their greenhouse gas emissions.

Phase II will run from 2008-2012 to coincide with the first Kyoto Protocol commitment period.