Emissions trading is a market-based approach used to control pollution

Pollution

Pollution is the introduction of contaminants into a natural environment that causes instability, disorder, harm or discomfort to the ecosystem i.e. physical systems or living organisms. Pollution can take the form of chemical substances or energy, such as noise, heat or light...

 by providing economic

Economics

Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

 incentive

Incentive

In economics and sociology, an incentive is any factor that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives. It is an expectation that encourages people to behave in a certain way...

s for achieving reductions in the emissions of pollutant

Pollutant

A pollutant is a waste material that pollutes air, water or soil, and is the cause of pollution.Three factors determine the severity of a pollutant: its chemical nature, its concentration and its persistence. Some pollutants are biodegradable and therefore will not persist in the environment in the...

s.

A central authority (usually a governmental

Government agency

A government or state agency is a permanent or semi-permanent organization in the machinery of government that is responsible for the oversight and administration of specific functions, such as an intelligence agency. There is a notable variety of agency types...

 body) sets a limit or cap on the amount of a pollutant that can be emitted. The limit or cap is allocated or sold to firms in the form of emissions permits which represent the right to emit or discharge a specific volume of the specified pollutant. Firms are required to hold a number of permits (or carbon credit

Carbon credit

A carbon credit is a generic term for any tradable certificate or permit representing the right to emit one tonne of carbon dioxide or the mass of another greenhouse gas with a carbon dioxide equivalent equivalent to one tonne of carbon dioxide....

s) equivalent to their emissions. The total number of permits cannot exceed the cap, limiting total emissions to that level. Firms that need to increase their emission permits must buy permits from those who require fewer permits.

The transfer of permits is referred to as a trade

Trade

Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...

. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions. Thus, in theory, those who can reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest cost to society.

There are active trading programs in several air pollutants. For greenhouse gases the largest is the European Union Emission Trading Scheme

European Union Emission Trading Scheme

The European Union Emissions Trading Scheme also known as the European Union Emissions Trading System, was the first large emissions trading scheme in the world. It was launched in 2005 to combat climate change and is a major pillar of EU climate policy...

, whose purpose is to avoid dangerous climate change

Avoiding Dangerous Climate Change

The related terms "avoiding dangerous climate change" and "preventing dangerous anthropogenic interference with the climate system" date to 1995 and earlier, in the Second Assesment Report of the International Panel on Climate Change and previous science it cites.In 2002, the United Nations...

. In the United States

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 there is a national market to reduce acid rain

Acid rain

Acid rain is a rain or any other form of precipitation that is unusually acidic, meaning that it possesses elevated levels of hydrogen ions . It can have harmful effects on plants, aquatic animals, and infrastructure. Acid rain is caused by emissions of carbon dioxide, sulfur dioxide and nitrogen...

 and several regional markets in nitrogen oxides. Markets for other pollutants tend to be smaller and more localized.

Pollution as an Externality

By definition, an externality

Externality

In economics, an externality is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit...

 is an activity of one entity that affects the welfare of another entity in a way that is outside the market mechanism. Pollution

Pollution

Pollution is the introduction of contaminants into a natural environment that causes instability, disorder, harm or discomfort to the ecosystem i.e. physical systems or living organisms. Pollution can take the form of chemical substances or energy, such as noise, heat or light...

 is the prime example most economists think of when discussing externalities. There are many different ways to address these from a public economics perspective including emissions fees, cap-and-trade, and command-and-control regulation. Here we will discuss cap-and-trade as the chosen public response to externalities.

Overview

The overall goal of an emissions trading plan is to minimize the cost of meeting a set emissions target. The cap is an enforceable limit on emissions that is usually lowered over time — aiming towards a national emissions reduction target. In other systems a portion of all traded credits must be retired, causing a net reduction in emissions each time a trade occurs. In many cap-and-trade systems, organizations which do not pollute may also participate, thus environmental groups can purchase and retire allowances or credits and hence drive up the price of the remainder according to the law of demand

Law of demand

In economics, the law of demand is an economic law that states that consumers buy more of a good when its price decreases and less when its price increases ....

. Corporations can also prematurely retire allowances by donating them to a nonprofit entity and then be eligible for a tax deduction.

Definitions

The economics literature provides the following definitions of cap and trade emissions trading schemes.

A cap-and-trade system constrains the aggregate emissions of regulated sources by creating a limited number of tradable emission allowances, which emission sources must secure and surrender in number equal to their emissions.

In an emissions trading or cap-and-trade scheme, a limit on access to a resource (the cap) is defined and then allocated among users in the form of permits. Compliance is established by comparing actual emissions with permits surrendered including any permits traded within the cap.

Under a tradable permit system, an allowable overall level of pollution is established and allocated among firms in the form of permits. Firms that keep their emission levels below their allotted level may sell their surplus permits to other firms or use them to offset excess emissions in other parts of their facilities.

Market-based and least-cost

Economists have urged the use of "market-based" instruments such as emissions trading to address environmental problems instead of prescriptive "command and control" regulation. Command and control regulation is criticized for being excessively rigid, insensitive to geographical and technological differences, and for being inefficient. However, emissions trading requires a cap to effectively reduce emissions, and the cap is a government regulatory mechanism. After a cap has been set by a government political process, individual companies are free to choose how or if they will reduce their emissions. Failure to reduce emissions is often punishable by a further government regulatory mechanism, a fine that increases costs of production. Firms will choose the least-costly way to comply with the pollution regulation, which will lead to reductions where the least expensive solutions exist, while allowing emissions that are more expensive to reduce.

Emission markets

For trading purposes, one allowance or Certified Emission Reduction (CER) is considered equivalent to one metric ton of CO₂ emissions. These allowances can be sold privately or in the international market at the prevailing market price. These trade and settle

Settlement (finance)

Settlement of securities is a business process whereby securities or interests in securities are delivered, usually against payment of money, to fulfill contractual obligations, such as those arising under securities trades....

 internationally and hence allow allowances to be transferred between countries. Each international transfer is validated by the UNFCCC. Each transfer of ownership within the European Union is additionally validated by the European Commission.

Climate exchanges have been established to provide a spot market

Spot market

The spot market or cash market is a public financial market, in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market in which delivery is due at a later date...

 in allowances, as well as futures and options

Option (finance)

In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...

 market

Futures exchange

A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of...

 to help discover a market price and maintain liquidity

Market liquidity

In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value...

. Carbon prices are normally quoted in Euro

Euro

The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...

s per tonne of carbon dioxide or its equivalent (CO₂e). Other greenhouse gasses can also be traded, but are quoted as standard multiples of carbon dioxide with respect to their global warming potential

Global warming potential

Global-warming potential is a relative measure of how much heat a greenhouse gas traps in the atmosphere. It compares the amount of heat trapped by a certain mass of the gas in question to the amount of heat trapped by a similar mass of carbon dioxide. A GWP is calculated over a specific time...

. These features reduce the quota's financial impact on business, while ensuring that the quotas are met at a national and international level.

Currently there are six exchanges trading in carbon allowances: the Chicago Climate Exchange

Chicago Climate Exchange

The now defunct Chicago Climate Exchange was North America’s only voluntary, legally binding greenhouse gas reduction and trading system for emission sources and offset projects in North America and Brazil....

 (till 2010), European Climate Exchange

European Climate Exchange

The European Climate Exchange manages the product development and marketing for ECX Carbon Financial Instruments , listed and admitted for trading on the ICE Futures Europe electronic platform. It is no longer a subsidiary of the Chicago Climate Exchange but rather a sister company...

, NASDAQ OMX Commodities Europe, PowerNext

Powernext

Powernext is a regulated investment firm based in Paris and operating under the multilateral trading facility status. Powernext designs and operates electronic trading platforms for spot and derivatives markets in the European energy sector...

, Commodity Exchange Bratislava and the European Energy Exchange

European Energy eXchange

European Energy Exchange AG, Germany's energy exchange, is the leading energy exchange in Central Europe.-Overview:The European Energy Exchange is located in Leipzig. Preceding companies were LPX Leipzig Power Exchange, located in Leipzig and European Energy Exchange, located in Frankfurt...

. NASDAQ OMX Commodities Europe listed a contract to trade offsets generated by a CDM carbon project

Carbon project

A carbon project refers to a business initiative that receives funding because of the cut the emission of greenhouse gases that will result...

 called Certified Emission Reductions. Many companies now engage in emissions abatement, offsetting, and sequestration programs to generate credits that can be sold on one of the exchanges. At least one private electronic market

Private electronic market

A private electronic market uses the Internet to connect a limited number or pre-qualified buyers or sellers in one market. PEMs are a hybrid between perfectly open markets A private electronic market (PEM) uses the Internet to connect a limited number or pre-qualified buyers or sellers in one...

 has been established in 2008: CantorCO2e. Carbon credits at Commodity Exchange Bratislava are traded at special platform - Carbon place.

Managing emissions is one of the fastest-growing segments in financial services in the City of London

City of London

The City of London is a small area within Greater London, England. It is the historic core of London around which the modern conurbation grew and has held city status since time immemorial. The City’s boundaries have remained almost unchanged since the Middle Ages, and it is now only a tiny part of...

 with a market estimated to be worth about €30 billion in 2007. Louis Redshaw, head of environmental markets at Barclays Capital

Barclays Capital

Barclays Capital is a global British investment bank. It is the investment banking division of Barclays plc which has a balance sheet of over £1.2 trillion . Barclays Capital provides financing and risk management services to large companies, institutions and government clients. It is a primary...

 predicts that "Carbon will be the world's biggest commodity market, and it could become the world's biggest market overall."

History

The efficiency of what later was to be called the "cap-and-trade" approach to air pollution

Air pollution

Air pollution is the introduction of chemicals, particulate matter, or biological materials that cause harm or discomfort to humans or other living organisms, or cause damage to the natural environment or built environment, into the atmosphere....

 abatement was first demonstrated in a series of micro-economic computer simulation studies between 1967 and 1970 for the National Air Pollution Control Administration (predecessor to the United States Environmental Protection Agency

United States Environmental Protection Agency

The U.S. Environmental Protection Agency is an agency of the federal government of the United States charged with protecting human health and the environment, by writing and enforcing regulations based on laws passed by Congress...

's Office of Air and Radiation) by Ellison Burton and William Sanjour. These studies used mathematical models of several cities and their emission sources in order to compare the cost and effectiveness of various control strategies. Each abatement strategy was compared with the "least cost solution" produced by a computer optimization program to identify the least costly combination of source reductions in order to achieve a given abatement goal. In each case it was found that the least cost solution was dramatically less costly than the same amount of pollution reduction produced by any conventional abatement strategy. Burton and later Sanjour along with Edward H. Pechan continued improving and advancing these computer models at the newly-created U.S. Environmental Protection agency. The agency introduced the concept of computer modeling with least cost abatement strategies (i.e. emissions trading) in its 1972 annual report to Congress on the cost of clean air. This led to the concept of "cap and trade" as a means of achieving the "least cost solution" for a given level of abatement.

The development of emissions trading over the course of its history can be divided into four phases:

1. Gestation: Theoretical articulation of the instrument (by Coase
   Ronald Coase
   Ronald Harry Coase is a British-born, American-based economist and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School. After studying with the University of London External Programme in 1927–29, Coase entered the London School of Economics, where he took...
   
   , Crocker, Dales, Montgomery etc.) and, independent of the former, tinkering with "flexible regulation" at the US Environmental Protection Agency.
2. Proof of Principle: First developments towards trading of emission certificates based on the "offset-mechanism" taken up in Clean Air Act in 1977.
3. Prototype: Launching of a first "cap-and-trade" system as part of the US Acid Rain Program
   Acid Rain Program
   The Acid Rain Program is a market-based initiative taken by the United States Environmental Protection Agency in an effort to reduce overall atmospheric levels of sulfur dioxide and nitrogen oxides, which cause acid rain...
   
    in Title IV of the 1990 Clean Air Act, officially announced as a paradigm shift in environmental policy, as prepared by "Project 88", a network-building effort to bring together environmental and industrial interests in the US.
4. Regime formation: branching out from the US clean air policy to global climate policy, and from there to the European Union, along with the expectation of an emerging global carbon
   Carbon
   Carbon is the chemical element with symbol C and atomic number 6. As a member of group 14 on the periodic table, it is nonmetallic and tetravalent—making four electrons available to form covalent chemical bonds...
   
    market and the formation of the "carbon industry".

In the United States, the "acid rain"-related emission trading system was principally conceived by C. Boyden Gray, a G.H.W. Bush

George H. W. Bush

George Herbert Walker Bush is an American politician who served as the 41st President of the United States . He had previously served as the 43rd Vice President of the United States , a congressman, an ambassador, and Director of Central Intelligence.Bush was born in Milton, Massachusetts, to...

 administration attorney. Gray worked with the Environmental Defense Fund (EDF), who worked with the EPA to write the bill that became law as part of the Clean Air Act of 1990. The new emissions cap on NOx and SO2 gases took effect in 1995, and according to Smithsonian Magazine, those acid rain emissions dropped 3 million tons that year.

Public opinion

In the United States, most polling shows large support for emissions trading (oftentimes referred to as cap-and-trade). This majority support can be seen in polls conducted by Washington Post/ABC News

ABC News

ABC News is the news gathering and broadcasting division of American broadcast television network ABC, a subsidiary of The Walt Disney Company...

, Zogby International

Zogby International

IBOPE Zogby International is an international market research, opinion polling firm founded in 1984 by John Zogby. The company polls and consults for a wide spectrum of business media, government, and political groups, and conducts public opinion research in more than 70 countries...

 and Yale University

Yale University

Yale University is a private, Ivy League university located in New Haven, Connecticut, United States. Founded in 1701 in the Colony of Connecticut, the university is the third-oldest institution of higher education in the United States...

.

According to PolitiFact, it's a misconception that emissions trading is unpopular in the United States because of earlier polls from Zogby International and Rasmussen

Rasmussen

The surname Rasmussen is a Danish and Norwegian surname, meaning "Rasmus' son" . It is the ninth most common surname in Denmark, shared by about 1.9% of the population....

 which misleadingly include "new taxes" (taxes aren't part of emissions trading) or high energy cost estimates.

Comparison of cap-and-trade with other methods of emission reduction

Cap-and-trade, offsets created through a baseline and credit approach, and a carbon tax are all market-based approaches that put a price on carbon and other greenhouse gases and provide an economic incentive to reduce emissions, beginning with the lowest-cost opportunities.

The textbook emissions trading program can be called a "cap-and-trade" approach in which an aggregate cap on all sources is established and these sources are then allowed to trade amongst themselves to determine which sources actually emit the total pollution load. An alternative approach with important differences is a baseline and credit program.

In a baseline and credit program polluters that are not under an aggregate cap can create credits, usually called offsets, by reducing their emissions below a baseline level of emissions. Such credits can be purchased by polluters that do have a regulatory limit.

Cap-and-trade versus Carbon tax and other methods

Cap-and-Trade versus Carbon tax

Regulation by Cap-and-trade emissions trading can be compared to emissions fees or environmental tax approaches under a number of possible criteria.

Responsiveness to inflation: In the case of inflation

Inflation

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

, cap-and-trade is at an advantage over emissions fees because it adjusts to the new prices automatically and no legislative or regulatory action is needed.

Responsiveness to cost changes: It is difficult to tell which is better between cap-and-trade and emissions fees therefore it might be a better option to combine the two resulting in the creation of a safety valve price (a price set by the government at which polluters can purchase additional permits beyond the cap).

Responsiveness to uncertainty: As with cost changes, in a world of uncertainty, it is not clear whether emissions fees or cap-and-trade systems are more efficient—it basically depends on how fast the marginal social benefits of reducing pollution fall with the amount of cleanup (e.g. whether inelastic or elastic marginal social benefit schedule).

Cap-and-Trade versus Command-and-Control Regulation:
Unlike emissions fees and cap-and-trade which are incentive based regulations, command-and-control regulations take a variety of forms and are much less flexible. An example of this is a performance standard which sets an emissions goal for each polluter that is fixed and therefore the burden of reducing pollution cannot be shifted to the firms that can achieve it more cheaply. So, as a result, performance standards are unlikely to be as cost effective as cap-and-trade emissions trading.

Economics of international emissions trading

It is possible for a country to reduce emissions using a Command-Control

Command and Control (government)

In management, command and control refers more generally to the maintenance of authority with somewhat more distributed decision making. In these civilian contexts, the term "command" is unfashionable but the meaning is the same. Some management science theorists even hold that the idea is now...

 approach, such as regulation, direct

Direct tax

The term direct tax generally means a tax paid directly to the government by the persons on whom it is imposed.-General meaning:In the general sense, a direct tax is one paid directly to the government by the persons on whom it is imposed...

 and indirect tax

Indirect tax

The term indirect tax has more than one meaning.In the colloquial sense, an indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax...

es. The cost of that approach differs between countries because the Marginal Abatement Cost Curve (MAC) — the cost of eliminating an additional unit of pollution — differs by country. It might cost China $2 to eliminate a ton of CO₂, but it would probably cost Norway or the U.S. much more. International emissions-trading markets were created precisely to exploit differing MACs.

Example

Emissions trading through Gains from Trade can be more beneficial for both the buyer and the seller than a simple emissions capping scheme.

Consider two European countries, such as Germany

Germany

Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...

 and Sweden

Sweden

Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund....

. Each can either reduce all the required amount of emissions by itself or it can choose to buy or sell in the market.

For this example let us assume that Germany can abate its CO₂ at a much cheaper cost than Sweden, e.g. MAC_S > MAC_G where the MAC curve of Sweden is steeper (higher slope) than that of Germany, and R_Req
is the total amount of emissions that need to be reduced by a country.

On the left side of the graph is the MAC curve for Germany. R_Req is the amount of required reductions for Germany, but at R_Req the MAC_G curve has not intersected the market allowance price of CO₂ (market allowance price = P = λ).
Thus, given the market price of CO₂ allowances, Germany has potential to profit if it abates more emissions than required.

On the right side is the MAC curve for Sweden. R_Req is the amount of required reductions for Sweden, but the MAC_S curve already intersects the market price of CO₂ allowances before R_Req has been reached. Thus, given the market allowance price of CO₂, Sweden has potential to make a cost saving if it abates fewer emissions than required internally, and instead abates them elsewhere.

In this example, Sweden would abate emissions until its MAC_S intersects with P (at R*), but this would only reduce a fraction of Sweden’s total required abatement.
After that it could buy emissions credits from Germany for the price P (per unit). The internal cost of Sweden’s own abatement, combined with the credits it buys in the market from Germany, adds up to the total required reductions (R_Req) for Sweden. Thus Sweden can make a saving from buying credits in the market (Δ d-e-f). This represents the "Gains from Trade", the amount of additional expense that Sweden would otherwise have to spend if it abated all of its required emissions by itself without trading.

Germany made a profit on its additional emissions abatement, above what was required: it met the regulations by abating all of the emissions that was required of it (R_Req). Additionally, Germany sold its surplus to Sweden as credits, and was paid P for every unit it abated, while spending less than P. Its total revenue is the area of the graph (R_Req 1 2 R*), its total abatement cost is area (R_Req 3 2 R*), and so its net benefit from selling emission credits is the area (Δ 1-2-3) i.e. Gains from Trade

The two R* (on both graphs) represent the efficient allocations that arise from trading.

• Germany: sold (R* - R_Req) emission credits to Sweden at a unit price P.
• Sweden bought emission credits from Germany at a unit price P.

If the total cost for reducing a particular amount of emissions in the Command Control scenario is called X, then to reduce the same amount of combined pollution in Sweden and Germany, the total abatement cost would be less in the Emissions Trading scenario i.e. (X — Δ 123 - Δ def).

The example above applies not just at the national level: it applies just as well between two companies in different countries, or between two subsidiaries within the same company.

Applying the economic theory

The nature of the pollutant plays a very important role when policy-makers decide which framework should be used to control pollution.

CO₂ acts globally, thus its impact on the environment is generally similar wherever in the globe it is released. So the location of the originator of the emissions does not really matter from an environmental standpoint.

The policy framework should be different for regional pollutants (e.g. SO₂

Sulfur dioxide

Sulfur dioxide is the chemical compound with the formula . It is released by volcanoes and in various industrial processes. Since coal and petroleum often contain sulfur compounds, their combustion generates sulfur dioxide unless the sulfur compounds are removed before burning the fuel...

 and NO_X

NOx

NOx is a generic term for the mono-nitrogen oxides NO and NO2 . They are produced from the reaction of nitrogen and oxygen gases in the air during combustion, especially at high temperatures...

, and also mercury) because the impact exerted by these pollutants may not be the same in all locations. The same amount of a regional pollutant can exert a very high impact in some locations and a low impact in other locations, so it does actually matter where the pollutant is released. This is known as the Hot Spot problem.

A Lagrange framework

Euler-Lagrange equation

In calculus of variations, the Euler–Lagrange equation, Euler's equation, or Lagrange's equation, is a differential equation whose solutions are the functions for which a given functional is stationary...

 is commonly used to determine the least cost of achieving an objective, in this case the total reduction in emissions required in a year. In some cases it is possible to use the Lagrange optimization framework to determine the required reductions for each country (based on their MAC) so that the total cost of reduction is minimized. In such a scenario, the Lagrange multiplier represents the market allowance price (P) of a pollutant, such as the current market allowance price of emissions in Europe and the USA.

Countries face the market allowance price that exists in the market that day, so they are able to make individual decisions that would minimize their costs while at the same time achieving regulatory compliance. This is also another version of the Equi-Marginal Principle

Ordinal utility

Ordinal utility theory states that while the utility of a particular good or service cannot be measured using a numerical scale bearing economic meaning in and of itself, pairs of alternative bundles of goods can be ordered such that one is considered by an individual to be worse than, equal to,...

, commonly used in economics to choose the most economically efficient decision.

Prices versus quantities, and the safety valve

There has been longstanding debate on the relative merits of price versus quantity instruments to achieve emission reductions.

An emission cap and permit trading system is a quantity instrument because it fixes the overall emission level (quantity) and allows the price to vary. Uncertainty in future supply and demand conditions (market volatility) coupled with a fixed number of pollution credits creates an uncertainty in the future price of pollution credits, and the industry must accordingly bear the cost of adapting to these volatile market conditions. The burden of a volatile market thus lies with the industry rather than the controlling agency, which is generally more efficient. However, under volatile market conditions, the ability of the controlling agency to alter the caps will translate into an ability to pick "winners and losers" and thus presents an opportunity for corruption.

In contrast, an emission tax

Carbon tax

A carbon tax is an environmental tax levied on the carbon content of fuels. It is a form of carbon pricing. Carbon is present in every hydrocarbon fuel and is released as carbon dioxide when they are burnt. In contrast, non-combustion energy sources—wind, sunlight, hydropower, and nuclear—do not...

 is a price instrument because it fixes the price while the emission level is allowed to vary according to economic activity. A major drawback of an emission tax is that the environmental outcome (e.g. a limit on the amount of emissions) is not guaranteed. On one hand, a tax will remove capital from the industry, suppressing possibly useful economic activity, but conversely, the polluter will not need to hedge as much against future uncertainty since the amount of tax will track with profits. The burden of a volatile market will be borne by the controlling (taxing) agency rather than the industry itself, which is generally less efficient. An advantage is that, given a uniform tax rate and a volatile market, the taxing entity will not be in a position to pick "winners and losers" and the opportunity for corruption will be less.

Assuming no corruption and assuming that the controlling agency and the industry are equally efficient at adapting to volatile market conditions, the best choice depends on the sensitivity of the costs of emission reduction, compared to the sensitivity of the benefits (i.e., climate damages avoided by a reduction) when the level of emission control is varied.

Because there is high uncertainty in the compliance costs of firms, some argue that the optimum choice is the price mechanism. However, the burden of uncertainty cannot be eliminated, and in this case it is shifted to the taxing agency itself.

Some scientists have warned of a threshold in atmospheric concentrations of carbon dioxide beyond which a run-away warming

Global warming

Global warming refers to the rising average temperature of Earth's atmosphere and oceans and its projected continuation. In the last 100 years, Earth's average surface temperature increased by about with about two thirds of the increase occurring over just the last three decades...

 effect could take place, with a large possibility of causing irreversible damages. If this is a conceivable risk then a quantity instrument could be a better choice because the quantity of emissions may be capped with a higher degree of certainty. However, this may not be true if this risk exists but cannot be attached to a known level of GHG concentration or a known emission pathway.

A third option, known as a safety valve, is a hybrid of the price and quantity instruments. The system is essentially an emission cap and permit trading system but the maximum (or minimum) permit price is capped. Emitters have the choice of either obtaining permits in the marketplace or purchasing them from the government at a specified trigger price (which could be adjusted over time). The system is sometimes recommended as a way of overcoming the fundamental disadvantages of both systems by giving governments the flexibility to adjust the system as new information comes to light. It can be shown that by setting the trigger price high enough, or the number of permits low enough, the safety valve can be used to mimic either a pure quantity or pure price mechanism.

All three methods are being used as policy instruments to control greenhouse gas emissions: the EU-ETS is a quantity system using the cap and trading system to meet targets set by National Allocation Plans; Denmark

Denmark

Denmark is a Scandinavian country in Northern Europe. The countries of Denmark and Greenland, as well as the Faroe Islands, constitute the Kingdom of Denmark . It is the southernmost of the Nordic countries, southwest of Sweden and south of Norway, and bordered to the south by Germany. Denmark...

 has a price system using a carbon tax

Carbon tax

A carbon tax is an environmental tax levied on the carbon content of fuels. It is a form of carbon pricing. Carbon is present in every hydrocarbon fuel and is released as carbon dioxide when they are burnt. In contrast, non-combustion energy sources—wind, sunlight, hydropower, and nuclear—do not...

 (World Bank, 2010, p. 218), while China uses the CO₂ market price for funding of its Clean Development Mechanism

Clean Development Mechanism

The Clean Development Mechanism is one of the "flexibility" mechanisms defined in the Kyoto Protocol . It is defined in Article 12 of the Protocol, and is intended to meet two objectives: to assist parties not included in Annex I in achieving sustainable development and in contributing to the...

 projects, but imposes a safety valve of a minimum price per tonne of CO₂.

Carbon leakage

Carbon leakage

Carbon leakage

Carbon leakage occurs when there is an increase in carbon dioxide emissions in one country as a result of an emissions reduction by a second country with a strict climate policy.Carbon leakage may occur for a number of reasons:...

 is the effect that regulation of emissions in one country/sector has on the emissions in other countries/sectors that are not subject to the same regulation (Barker et al.., 2007). There is no consensus over the magnitude of long-term carbon leakage (Goldemberg et al., 1996, p. 31).

In the Kyoto Protocol, Annex I countries are subject to caps on emissions, but non-Annex I countries are not. Barker et al.. (2007) assessed the literature on leakage. The leakage rate is defined as the increase in CO₂ emissions outside of the countries taking domestic mitigation action, divided by the reduction in emissions of countries taking domestic mitigation action. Accordingly, a leakage rate greater than 100% would mean that domestic actions to reduce emissions had had the effect of increasing emissions in other countries to a greater extent, i.e., domestic mitigation action had actually led to an increase in global emissions.

Estimates of leakage rates for action under the Kyoto Protocol ranged from 5 to 20% as a result of a loss in price competitiveness, but these leakage rates were viewed as being very uncertain. For energy-intensive industries, the beneficial effects of Annex I actions through technological development were viewed as possibly being substantial. This beneficial effect, however, had not been reliably quantified. On the empirical evidence they assessed, Barker et al.. (2007) concluded that the competitive losses of then-current mitigation actions, e.g., the EU ETS, were not significant.

Trade

One of the controversies about carbon mitigation policy thus arises about how to "level the playing field" with border adjustments. One component of the American Clean Energy and Security Act

American Clean Energy and Security Act

The American Clean Energy and Security Act of 2009 was an energy bill in the 111th United States Congress that would have established a variant of an emissions trading plan similar to the European Union Emission Trading Scheme...

, for example, along with several other energy bills put before Congress, calls for carbon surcharges on goods imported from countries without cap-and-trade programs. Even aside from issues of compliance with the General Agreement on Tariffs and Trade

General Agreement on Tariffs and Trade

The General Agreement on Tariffs and Trade was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization . GATT was signed in 1947 and lasted until 1993, when it was replaced by the World...

, such border adjustments presume that the producing countries bear responsibility for the carbon emissions.

A general perception among developing countries is that discussion of climate change in trade negotiations could lead to "green protectionism

Protectionism

Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...

" by high-income countries (World Bank, 2010, p. 251). Tariffs on imports ("virtual carbon") consistent with a carbon price of $50 per ton of CO₂ could be significant for developing countries. World Bank (2010) commented that introducing border tariffs could lead to a proliferation of trade measures where the competitive playing field is viewed as being uneven. Tariffs could also be a burden on low-income countries that have contributed very little to the problem of climate change.

Kyoto Protocol

As the IPCC reports came in over the years they shed abundant light on the true state of global warming and they gave support to the environmental effort to address this unprecedented problem. However, the same discussions that started decades back had never ceased and the crusade for a tangible solution to global climate change had gone on all the while. In 1997 the Kyoto Protocol was adopted.
The Kyoto Protocol

Kyoto Protocol

The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change , aimed at fighting global warming...

 is a 1997 international treaty which came into force in 2005. In the treaty, most developed nations agreed to legally binding targets for their emissions of the six major greenhouse gases. Emission quotas (known as "Assigned amounts") were agreed by each participating 'Annex 1' country, with the intention of reducing the overall emissions by 5.2% from their 1990 levels by the end of 2012. The United States is the only industrialized nation under Annex I that has not ratified the treaty, and is therefore not bound by it. The Intergovernmental Panel on Climate Change

Intergovernmental Panel on Climate Change

The Intergovernmental Panel on Climate Change is a scientific intergovernmental body which provides comprehensive assessments of current scientific, technical and socio-economic information worldwide about the risk of climate change caused by human activity, its potential environmental and...

 has projected that the financial effect of compliance through trading within the Kyoto commitment period will be limited at between 0.1-1.1% of GDP among trading countries.

The Protocol defines several mechanisms ("flexible mechanisms

Flexible Mechanisms

Flexible mechanisms, also sometimes known as Flexibility Mechanisms or Kyoto Mechanisms), refers to Emissions Trading, the Clean Development Mechanism and Joint Implementation. These are mechanisms defined under the Kyoto Protocol intended to lower the overall costs of achieving its emissions targets...

") that are designed to allow Annex I countries to meet their emission reduction commitments (caps) with reduced economic impact (IPCC, 2007).

Under Article 3.3 of the Kyoto Protocol, Annex 1 Parties may use GHG removals, from afforestation and reforestation (forest sinks) and deforestation (sources) since 1990, to meet their emission reduction commitments.

Annex 1 Parties may also use International Emissions Trading (IET). Under the treaty, for the 5-year compliance period from 2008 until 2012, nations that emit less than their quota will be able to sell Assigned amount units

Assigned amount units

An Assigned Amount Unit is a tradable 'Kyoto unit' or 'carbon credit' representing an allowance to emit greenhouse gases comprising one metric tonne of carbon dioxide equivalents calculated using their Global Warming Potential....

 to nations that exceed their quota. It is also possible for Annex I countries to sponsor carbon project

Carbon project

A carbon project refers to a business initiative that receives funding because of the cut the emission of greenhouse gases that will result...

s that reduce greenhouse gas emissions in other countries. These projects generate tradable carbon credits that can be used by Annex I countries in meeting their caps. The project-based Kyoto Mechanisms are the Clean Development Mechanism

Clean Development Mechanism

The Clean Development Mechanism is one of the "flexibility" mechanisms defined in the Kyoto Protocol . It is defined in Article 12 of the Protocol, and is intended to meet two objectives: to assist parties not included in Annex I in achieving sustainable development and in contributing to the...

 (CDM) and Joint Implementation

Joint Implementation

Joint implementation is one of three flexibility mechanisms set forth in the Kyoto Protocol to help countries with binding greenhouse gas emissions targets meet their obligations. JI is set forth in Article 6 of the Kyoto Protocol...

 (JI).

The CDM covers projects taking place in non-Annex I countries, while JI covers projects taking place in Annex I countries. CDM projects are supposed to contribute to sustainable development

Sustainable development

Sustainable development is a pattern of resource use, that aims to meet human needs while preserving the environment so that these needs can be met not only in the present, but also for generations to come...

 in developing countries, and also generate "real" and "additional" emission savings, i.e., savings that only occur thanks to the CDM project in question (Carbon Trust, 2009, p. 14). Whether or not these emission savings are genuine is, however, difficult to prove (World Bank, 2010, pp. 265–267).

Australia

In 2003 the New South Wales (NSW) state government unilaterally established the NSW Greenhouse Gas Abatement Scheme to reduce emissions by requiring electricity generators and large consumers to purchase NSW Greenhouse Abatement Certificates (NGACs). This has prompted the rollout of free energy-efficient compact fluorescent lightbulbs and other energy-efficiency measures, funded by the credits. This scheme has been criticised by the Centre for Energy and Environmental Markets (CEEM) of the UNSW because of its lack of effectiveness in reducing emissions, its lack of transparency and its lack of verification of the additionality of emission reductions.

Both the incumbent Howard

John Howard

John Winston Howard AC, SSI, was the 25th Prime Minister of Australia, from 11 March 1996 to 3 December 2007. He was the second-longest serving Australian Prime Minister after Sir Robert Menzies....

 Coalition

Coalition (Australia)

The Coalition in Australian politics refers to a group of centre-right parties that has existed in the form of a coalition agreement since 1922...

 government and the Rudd

Kevin Rudd

Kevin Michael Rudd is an Australian politician who was the 26th Prime Minister of Australia from 2007 to 2010. He has been Minister for Foreign Affairs since 2010...

 Labor

Australian Labor Party

The Australian Labor Party is an Australian political party. It has been the governing party of the Commonwealth of Australia since the 2007 federal election. Julia Gillard is the party's federal parliamentary leader and Prime Minister of Australia...

 opposition promised to implement an emissions trading scheme (ETS) before the 2007 federal election. Labor won the election, with the new government proceeding to implement an ETS. The government introduced the Carbon Pollution Reduction Scheme

Carbon Pollution Reduction Scheme

The Carbon Pollution Reduction Scheme was a proposed cap-and-trade system of emissions trading for anthropogenic greenhouse gases, due to be introduced in Australia in 2010 by the Rudd government, as part of its climate change policy. It marked a major change in the energy policy of Australia...

, which the Liberals

Liberal Party of Australia

The Liberal Party of Australia is an Australian political party.Founded a year after the 1943 federal election to replace the United Australia Party, the centre-right Liberal Party typically competes with the centre-left Australian Labor Party for political office...

 supported with Malcolm Turnbull

Malcolm Turnbull

Malcolm Bligh Turnbull is an Australian politician. He has been a member of the Australian House of Representatives since 2004, and was Leader of the Opposition and parliamentary leader of the Liberal Party from 16 September 2008 to 1 December 2009.Turnbull has represented the Division...

 as leader. Tony Abbott

Tony Abbott

Anthony John "Tony" Abbott is the Leader of the Opposition in the Australian House of Representatives and federal leader of the centre-right Liberal Party of Australia. Abbott has represented the seat of Warringah since the 1994 by-election...

 questioned an ETS, saying the best way to reduce emissions is with a "simple tax". Shortly before the carbon vote, Abbott defeated Turnbull in a leadership challenge, and from there on the Liberals opposed the ETS. This left the government unable to secure passage of the bill and it was subsequently withdrawn.

Julia Gillard

Julia Gillard

Julia Eileen Gillard is the 27th and current Prime Minister of Australia, in office since June 2010.Gillard was born in Barry, Vale of Glamorgan, Wales and migrated with her family to Adelaide, Australia in 1966, attending Mitcham Demonstration School and Unley High School. In 1982 Gillard moved...

 defeated Rudd in a leadership challenge and from there on said no carbon tax would be introduced under a government she led when taking the government to the 2010 election. In the first hung parliament

Hung parliament

In a two-party parliamentary system of government, a hung parliament occurs when neither major political party has an absolute majority of seats in the parliament . It is also less commonly known as a balanced parliament or a legislature under no overall control...

 result in 70 years, the government required the support of crossbenchers including the Greens

Australian Greens

The Australian Greens, commonly known as The Greens, is an Australian green political party.The party was formed in 1992; however, its origins can be traced to the early environmental movement in Australia and the formation of the United Tasmania Group , the first Green party in the world, which...

. One requirement for Green support was a carbon tax, which Gillard proceeded with in forming a minority government. A fixed-price carbon tax would proceed to a floating-price ETS within a few years under the plans. The government proposed the Clean Energy Bill

Clean Energy Bill, 2011

The Clean Energy Bill 2011 is a package of legislation that will establish a proposed Australian emissions trading scheme designed to reduce carbon dioxide emissions and limit global warming.-History:...

 in February 2011, which the opposition claimed to be a broken election promise. The Liberal Party vowed to overturn the bill if it is elected.

The bill was passed by the Lower House

Australian House of Representatives

The House of Representatives is one of the two houses of the Parliament of Australia; it is the lower house; the upper house is the Senate. Members of Parliament serve for terms of approximately three years....

 in October 2011 and the Upper House

Australian Senate

The Senate is the upper house of the bicameral Parliament of Australia, the lower house being the House of Representatives. Senators are popularly elected under a system of proportional representation. Senators are elected for a term that is usually six years; after a double dissolution, however,...

 in November 2011.

New Zealand

The New Zealand Emissions Trading Scheme (NZ ETS) is a national all-sectors all-greenhouse gas

Greenhouse gas

A greenhouse gas is a gas in an atmosphere that absorbs and emits radiation within the thermal infrared range. This process is the fundamental cause of the greenhouse effect. The primary greenhouse gases in the Earth's atmosphere are water vapor, carbon dioxide, methane, nitrous oxide, and ozone...

es uncapped emissions trading scheme first legislated

Climate Change Response (Emissions Trading) Amendment Act 2008

The Climate Change Response Amendment Act 2008 was a statute enacted in September 2008 by the Fifth Labour Government of New Zealand that established the first version of the New Zealand Emissions Trading Scheme, a national all-sectors all-greenhouse gases uncapped emissions trading...

 in September 2008 by the Fifth Labour Government of New Zealand

Fifth Labour Government of New Zealand

The Fifth Labour Government of New Zealand was the government of New Zealand between 10 December 1999 and 19 November 2008.-Overview:The fourth National government, in power since 1990, was widely unpopular by 1999, with much of the public antagonised by a series of free-market economic reforms,...

 and amended in November 2009 by the Fifth National Government of New Zealand

Fifth National Government of New Zealand

The Fifth National Government of New Zealand is the current government of New Zealand. It is led by Prime Minister John Key.After the 2008 general election the National Party and its allies were able to form a government, taking over from Helen Clark's Fifth Labour Government. The National party...

.

Although the NZ ETS covers all-sectors and all-gases, individual sectors of the economy have different entry dates when their obligations to report emissions and surrender emission units have effect. Forestry, a net sink which contributed removals of 14 Mts of CO₂e

Carbon dioxide equivalent

Carbon dioxide equivalent and Equivalent carbon dioxide are two related but distinct measures for describing how much global warming a given type and amount of greenhouse gas may cause, using the functionally equivalent amount or concentration of carbon dioxide as the reference.- Global warming...

 in 2008 or 19% of NZ's 2008 emissions, entered on 1 January 2008. Emissions from stationary energy, industrial and liquid fossil fuel sectors (34 Mts in 2008, 45% of 2008 emissions, entered the NZ ETS on 1 July 2010. Agricultural emissions (mainly 35 Mts of methane and nitrous oxide emissions from pastoral ruminants or 47% of 2008 emissions) do not enter the scheme until 1 January 2015.

Tradable emission units will be issued by free allocation to emitters, with no auctions in the short term. The fishing sector will receive free units on a historic basis, 90 per cent of their 2005 emissions (bullet points 9 & 10 MfE September 2009). Pre-1990 forests will receive a fixed free allocation of 60 emissions units per hectare. Allocation to emissions-intensive industry, and agriculture will be provided on an output-intensity basis, which will be based on the industry average emissions per unit of output and will be uncapped. Bertram and Terry (2010, p 16 ) state that as there is no 'cap' on emissions, the NZ ETS is not a cap and trade scheme as understood in the economics literature.

A transition period will operate from 1 July 2010 until 31 December 2012. During this period the price of New Zealand Emissions Units (NZUs) will be capped at NZ$25. Also, one unit will only need to be surrendered for every two tonnes of carbon dioxide equivalent emissions, effectively reducing the carbon price to NZ$12.50 per tonne (MfE 2009, second bullet point).

Section 3 of the Climate Change Response Act 2002

Climate Change Response Act 2002

The Climate Change Response Act 2002 is an Act of Parliament passed by the government of New Zealand.The Climate Change Response Act 2002 creates the legal framework for New Zealand to ratify the Kyoto Protocol and to meet obligations under the United Nations Framework Convention on Climate...

 (the Act) defines the purpose of the Act as to reduce emissions from business-as-usual-levels and to fulfill New Zealand's international obligations under the United Nations Frame Work Convention on Climate Change (UNFCCC) and the Kyoto Protocol

Kyoto Protocol

The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change , aimed at fighting global warming...

. Some stakeholders have criticized the New Zealand Emissions Trading Scheme for its generous free allocations of emission units and the lack of a carbon price signal (the Parliamentary Commissioner for the Environment

Parliamentary Commissioner for the Environment

The Parliamentary Commissioner for the Environment is an independent Officer of the New Zealand Parliament appointed by the Governor-General on the recommendation of the House of Representatives for a five-year term under the Environment Act 1986...

), and being ineffective in reducing emissions (Greenpeace NZ).

European Union

The European Union Emission Trading Scheme (or EU ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world. It is one of the EU's central policy instruments to meet their cap set in the Kyoto Protocol (Jones et al.., 2007, p. 64).

After voluntary trials in the UK

UK Emissions Trading Scheme

The UK Emissions Trading Scheme was a voluntary emissions trading system created as a pilot prior to the mandatory European Union Emissions Trading Scheme which it now runs in parallel with. It ran from 2002 and it closed to new entrants in 2009...

 and Denmark, Phase I commenced operation in January 2005 with all 15 (now 25 of the 27) member states of the European Union

European Union

The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...

 participating. The program caps the amount of carbon dioxide that can be emitted from large installations with a net heat supply in excess of 20 MW, such as power plants and carbon intensive factories and covers almost half (46%) of the EU's Carbon Dioxide emissions. Phase I permits participants to trade amongst themselves and in validated credits from the developing world through Kyoto's Clean Development Mechanism

Clean Development Mechanism

The Clean Development Mechanism is one of the "flexibility" mechanisms defined in the Kyoto Protocol . It is defined in Article 12 of the Protocol, and is intended to meet two objectives: to assist parties not included in Annex I in achieving sustainable development and in contributing to the...

.

During Phases I and II, allowances for emissions have typically been given free to firms, which has resulted in them getting windfall profits (CCC, 2008, p. 149). Ellerman and Buchner (2008) (referenced by Grubb et al.., 2009, p. 11) suggested that during its first two years in operation, the EU ETS turned an expected increase in emissions of 1-2 percent per year into a small absolute decline. Grubb et al.. (2009, p. 11) suggested that a reasonable estimate for the emissions cut achieved during its first two years of operation was 50-100 MtCO₂ per year, or 2.5-5 percent.

A number of design flaws have limited the effectiveness of scheme (Jones et al.., 2007, p. 64). In the initial 2005-07 period, emission caps were not tight enough to drive a significant reduction in emissions (CCC, 2008, p. 149). The total allocation of allowances turned out to exceed actual emissions. This drove the carbon price down to zero in 2007. This oversupply reflects the difficulty in predicting future emissions which is necessary in setting a cap.

Phase II saw some tightening, but the use of JI and CDM offsets was allowed, with the result that no reductions in the EU will be required to meet the Phase II cap (CCC, 2008, pp. 145, 149). For Phase II, the cap is expected to result in an emissions reduction in 2010 of about 2.4% compared to expected emissions without the cap (business-as-usual emissions) (Jones et al.., 2007, p. 64). For Phase III (2013–20), the European Commission

European Commission

The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....

 has proposed a number of changes, including:

• the setting an overall EU cap, with allowances then allocated to EU members;
• tighter limits on the use of offsets;
• unlimiting banking of allowances between Phases II and III;
• and a move from allowances to auctioning.

In January 2008 Norway, Iceland, and Lichtenstein, joined the European Union Emissions Trading System (EU ETS) according to a publication from the European Commission

European Commission

The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....

. The Norwegian Ministry of the Environment

Norwegian Ministry of the Environment

The Royal Norwegian Ministry of the Environment is a Norwegian ministry established in 1972. The ministry is responsible for environmental issues in Norway. It is led by the Minister of the Environment, Erik Solheim...

 has also released its draft National Allocation Plan which provides a carbon cap-and-trade of 15 million metric tonnes of CO₂, 8 million of which are set to be auctioned. According to the OECD Economic Survey of Norway 2010, the nation "has announced a target for 2008-12 10% below its commitment under the Kyoto Protocol and a 30% cut compared with 1990 by 2020."
According to UBS Investment Research the system has cost $287 billion till 2011 with "almost zero impact" on overall emissions in European Union and the money could have result in over 40% reduction if used in targeted way, e.g. to upgrade power plants.

Tokyo, Japan

The Japanese city of Tokyo is like a country in its own right in terms of its energy consumption and GDP. Tokyo consumes as much energy as "entire countries in Northern Europe, and its production matches the GNP of the world’s 16th largest country". Originally, Japan had its own cap and trade system that had been in place for some years, but was not effective. Japan has its own emission reduction policy but not a nationwide cap and trade program.
This climate strategy is enforced and overseen by the Tokyo Metropolitan Government (TMG). The first phase, which is alike to Japan's scheme, runs up to 2014, these organizations will have to cut their carbon emissions by 6%; those who fail to operate within their emission caps will from 2011 on be required to purchase emission allowances to cover any excess emissions, or alternatively, invest in renewable energy certificates or offset credits issued by smaller businesses or branch offices. Firms whom fail to comply will face fines. According to local reports, organizations that do not operate within their caps will also be ordered to cut emissions by 1.3 times the amount they failed to reduce during the first phase of the scheme. The long term aim is to cut the metropolis' carbon emissions by 25% from 2000 levels by 2020.

United States

An early example of an emission trading system has been the SO₂ trading system under the framework of the Acid Rain Program

Acid Rain Program

The Acid Rain Program is a market-based initiative taken by the United States Environmental Protection Agency in an effort to reduce overall atmospheric levels of sulfur dioxide and nitrogen oxides, which cause acid rain...

 of the 1990 Clean Air Act in the U.S. Under the program, which is essentially a cap-and-trade emissions trading system, SO₂ emissions were reduced by 50% from 1980 levels by 2007. Some experts argue that the cap-and-trade system of SO₂ emissions reduction has reduced the cost of controlling acid rain by as much as 80% versus source-by-source reduction. The SO₂ program was challenged in 2004, which set in motion a series of events that led to the 2011 Cross-State Air Pollution Rule (CSAPR). Under the CSAPR, the national SO₂ trading program with four separate trading groups for SO₂ and NOx.

In 1997, the State of Illinois

Illinois

Illinois is the fifth-most populous state of the United States of America, and is often noted for being a microcosm of the entire country. With Chicago in the northeast, small industrial cities and great agricultural productivity in central and northern Illinois, and natural resources like coal,...

 adopted a trading program for volatile organic compound

Volatile organic compound

Volatile organic compounds are organic chemicals that have a high vapor pressure at ordinary, room-temperature conditions. Their high vapor pressure results from a low boiling point, which causes large numbers of molecules to evaporate or sublimate from the liquid or solid form of the compound and...

s in most of the Chicago area, called the Emissions Reduction Market System. Beginning in 2000, over 100 major sources of pollution in eight Illinois counties began trading pollution credits.

In 2003, New York State

New York

New York is a state in the Northeastern region of the United States. It is the nation's third most populous state. New York is bordered by New Jersey and Pennsylvania to the south, and by Connecticut, Massachusetts and Vermont to the east...

 proposed and attained commitments from nine Northeast

Northeastern United States

The Northeastern United States is a region of the United States as defined by the United States Census Bureau.-Composition:The region comprises nine states: the New England states of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont; and the Mid-Atlantic states of New...

 states to form a cap-and-trade carbon dioxide

Carbon dioxide

Carbon dioxide is a naturally occurring chemical compound composed of two oxygen atoms covalently bonded to a single carbon atom...

 emissions program for power generators, called the Regional Greenhouse Gas Initiative

Regional Greenhouse Gas Initiative

Regional Greenhouse Gas Initiative is a regional initiative by states and provinces in the Northeastern United States and Eastern Canada regions to reduce greenhouse gas emissions...

 (RGGI). This program launched on January 1, 2009 with the aim to reduce the carbon "budget" of each state's electricity generation sector to 10% below their 2009 allowances by 2018.

Also in 2003, U.S. corporations were able to trade CO₂ emission allowances on the Chicago Climate Exchange

Chicago Climate Exchange

The now defunct Chicago Climate Exchange was North America’s only voluntary, legally binding greenhouse gas reduction and trading system for emission sources and offset projects in North America and Brazil....

 under a voluntary scheme. In August 2007, the Exchange announced a mechanism to create emission offsets

Carbon offset

A carbon offset is a reduction in emissions of carbon dioxide or greenhouse gases made in order to compensate for or to offset an emission made elsewhere....

 for projects within the United States that cleanly destroy ozone

Ozone

Ozone , or trioxygen, is a triatomic molecule, consisting of three oxygen atoms. It is an allotrope of oxygen that is much less stable than the diatomic allotrope...

-depleting substances.

Also in 2003, the Environmental Protection Agency (EPA) began to administer the NOx Budget Trading Program (NBP)under the NOx State Implementation Plan (also known as the “NOx SIP Call”) The NOx Budget Trading Program was a market-based cap and trade program created to reduce emissions of nitrogen oxides (NOx) from power plants and other large combustion sources in the eastern United States. NOx is a prime ingredient in the formation of ground-level ozone (smog), a pervasive air pollution problem in many areas of the eastern United States. The NBP was designed to reduce NOx emissions during the warm summer months, referred to as the ozone season, when ground-level ozone concentrations are highest. In March 2008, EPA again strengthened the 8-hour ozone standard to 0.075 parts per million (ppm) from its previous 0.008 ppm.

In 2006, the California Legislature passed the California Global Warming Solutions Act, AB-32, which was signed into law by Governor Arnold Schwarzenegger

Arnold Schwarzenegger

Arnold Alois Schwarzenegger is an Austrian-American former professional bodybuilder, actor, businessman, investor, and politician. Schwarzenegger served as the 38th Governor of California from 2003 until 2011....

. Thus far, flexible mechanisms in the form of project based offsets have been suggested for three main project types. The project types include: manure management

Manure management

Manure management refers to capture, storage, treatment, and utilization of animal manures in an environmentally sustainable manner. It can be retained in various holding facilities. Animal manure can occur in a liquid, slurry, or solid form...

, forestry, and destruction of ozone-depleted substances. However, a recent ruling from Judge Ernest H. Goldsmith of San Francisco's Superior Court states that the rules governing California's cap-and-trade system were adopted without a proper analysis of alternative methods to reduce greenhouse gas emissions. The tentative ruling, issued on January 24, 2011, argues that the California Air Resources Board

California Air Resources Board

The California Air Resources Board, also known as CARB or ARB, is the "clean air agency" in the government of California. Established in 1967 in the Mulford-Carrell Act, combining the Bureau of Air Sanitation and the Motor Vehicle Pollution Control Board, CARB is a department within the...

 violated state environmental law by failing to consider such alternatives. If the decision is made final, the state would not be allowed to implement its proposed cap-and-trade system until the California Air Resources Board fully complies with the California Environmental Quality Act

California Environmental Quality Act

The California Environmental Quality Act is a California statute passed in 1970, shortly after the United States federal government passed the National Environmental Policy Act , to institute a statewide policy of environmental protection...

.

Since February 2007, seven U.S. states and four Canadian provinces have joined together to create the Western Climate Initiative

Western Climate Initiative

The Western Climate Initiative, or WCI, is an initiative—started by states and provinces along the western rim of North America—to combat climate change caused by global warming, independent of their national governments....

 (WCI),a regional greenhouse gas emissions trading system. July 2010, a meeting took place to further outline the cap-and-trade system which if accepted would curb greenhouse gas emissions by January 2012.

On November 17, 2008 President-elect Barack Obama

Barack Obama

Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...

 clarified, in a talk recorded for YouTube

YouTube

YouTube is a video-sharing website, created by three former PayPal employees in February 2005, on which users can upload, view and share videos....

, his intentions for the US to enter a cap-and-trade system to limit global warming

Global warming

Global warming refers to the rising average temperature of Earth's atmosphere and oceans and its projected continuation. In the last 100 years, Earth's average surface temperature increased by about with about two thirds of the increase occurring over just the last three decades...

.

The 2010 United States federal budget

2010 United States federal budget

The United States Federal Budget for Fiscal Year 2010, titled A New Era of Responsibility: Renewing America's Promise, is a spending request by President Barack Obama to fund government operations for October 2009–September 2010...

 proposes to support clean energy development with a 10-year investment of US $15 billion per year, generated from the sale of greenhouse gas (GHG) emissions credits. Under the proposed cap-and-trade program, all GHG emissions credits would be auctioned off, generating an estimated $78.7 billion in additional revenue in FY 2012, steadily increasing to $83 billion by FY 2019.

The American Clean Energy and Security Act

American Clean Energy and Security Act

The American Clean Energy and Security Act of 2009 was an energy bill in the 111th United States Congress that would have established a variant of an emissions trading plan similar to the European Union Emission Trading Scheme...

 (H.R. 2454), a greenhouse gas cap-and-trade bill, was passed on June 26, 2009, in the House of Representatives by a vote of 219-212. The bill originated in the House Energy and Commerce Committee and was introduced by Rep. Henry A. Waxman and Rep. Edward J. Markey. It was never passed in the Senate. The big Republican wins in the November 2010 U.S. Congressional election have further reduced the chances of a climate bill being adopted during President Barack Obama's first term.

Renewable energy certificates

Renewable Energy Certificates, or "green tags", are transferable rights for renewable energy within some American states. A renewable energy

Renewable energy

Renewable energy is energy which comes from natural resources such as sunlight, wind, rain, tides, and geothermal heat, which are renewable . About 16% of global final energy consumption comes from renewables, with 10% coming from traditional biomass, which is mainly used for heating, and 3.4% from...

 provider gets issued one green tag for each 1,000 kWh of energy it produces. The energy is sold into the electrical grid, and the certificates can be sold on the open market for profit. They are purchased by firms or individuals in order to identify a portion of their energy with renewable sources and are voluntary.

They are typically used like an offsetting scheme

Carbon offset

A carbon offset is a reduction in emissions of carbon dioxide or greenhouse gases made in order to compensate for or to offset an emission made elsewhere....

 or to show corporate responsibility, although their issuance is unregulated, with no national registry to ensure there is no double-counting. However, it is one way that an organization could purchase its energy from a local provider who uses fossil fuels, but back it with a certificate that supports a specific wind or hydro power project.

Carbon market

Carbon emissions trading is emissions trading specifically for carbon dioxide

Carbon dioxide

Carbon dioxide is a naturally occurring chemical compound composed of two oxygen atoms covalently bonded to a single carbon atom...

 (calculated in tonnes of carbon dioxide equivalent

Carbon dioxide equivalent

Carbon dioxide equivalent and Equivalent carbon dioxide are two related but distinct measures for describing how much global warming a given type and amount of greenhouse gas may cause, using the functionally equivalent amount or concentration of carbon dioxide as the reference.- Global warming...

 or tCO₂e) and currently makes up the bulk of emissions trading. It is one of the ways countries can meet their obligations under the Kyoto Protocol

Kyoto Protocol

The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change , aimed at fighting global warming...

 to reduce carbon emissions and thereby mitigate global warming

Mitigation of global warming

Climate change mitigation is action to decrease the intensity of radiative forcing in order to reduce the potential effects of global warming. Mitigation is distinguished from adaptation to global warming, which involves acting to tolerate the effects of global warming...

.

Market trend

Carbon emissions trading has been steadily increasing in recent years. According to the World Bank

World Bank

The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...

's Carbon Finance Unit, 374 million metric tonnes of carbon dioxide equivalent (tCO₂e) were exchanged through projects in 2005, a 240% increase relative to 2004 (110 mtCO₂e) which was itself a 41% increase relative to 2003 (78 mtCO₂e).

In terms of dollars, the World Bank has estimated that the size of the carbon market was 11 billion USD in 2005, 30 billion USD in 2006, and 64 billion in 2007.

The Marrakesh Accords of the Kyoto protocol defined the international trading mechanisms and registries needed to support trading between countries, with allowance trading now occurring between European countries and Asian countries. However, while the USA as a nation did not ratify the Protocol, many of its states are now developing cap-and-trade systems and are looking at ways to link their emissions trading systems together, nationally and internationally, to seek out the lowest costs and improve liquidity of the market. However, these states also wish to preserve their individual integrity and unique features. For example, in contrast to the other Kyoto-compliant systems, some states propose other types of greenhouse gas sources, different measurement methods, setting a maximum on the price of allowances, or restricting access to CDM projects. Creating instruments that are not truly fungible

Fungibility

Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution, such as crude oil, wheat, precious metals or currencies...

 would introduce instability and make pricing difficult.
Various proposals are being investigated to see how these systems might be linked across markets, with the International Carbon Action Partnership

International Carbon Action Partnership

The International Carbon Action Partnership was founded on October 29, 2007, by a group of 15 governments in Lisbon, Portugal. ICAP is an international cooperation forum between states and substate regions aiming to link regional Emission Trading Schemes...

 (ICAP) as an international body to help co-ordinate this.

Business reaction

With the creation of a market

Market

A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...

 for mandatory trading of carbon dioxide emissions within the Kyoto Protocol, the London financial marketplace

City of London

The City of London is a small area within Greater London, England. It is the historic core of London around which the modern conurbation grew and has held city status since time immemorial. The City’s boundaries have remained almost unchanged since the Middle Ages, and it is now only a tiny part of...

 has established itself as the center of the carbon finance market, and is expected to have grown into a market valued at $60 billion in 2007. The voluntary offset market, by comparison, is projected to grow to about $4bn by 2010.

23 multinational corporation

Multinational corporation

A multi national corporation or enterprise , is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation...

s came together in the G8 Climate Change Roundtable

G8 Climate Change Roundtable

The G8 Climate Change Roundtable was formed in January 2005 at the World Economic Forum in Davos. The first meeting was held in Gleneagles, Scotland, from 6–8 July 2005, to coincide with the 31st G8 summit....

, a business group formed at the January 2005 World Economic Forum

World Economic Forum

The World Economic Forum is a Swiss non-profit foundation, based in Cologny, Geneva, best known for its annual meeting in Davos, a mountain resort in Graubünden, in the eastern Alps region of Switzerland....

. The group included Ford

Ford Motor Company

Ford Motor Company is an American multinational automaker based in Dearborn, Michigan, a suburb of Detroit. The automaker was founded by Henry Ford and incorporated on June 16, 1903. In addition to the Ford and Lincoln brands, Ford also owns a small stake in Mazda in Japan and Aston Martin in the UK...

, Toyota, British Airways

British Airways

British Airways is the flag carrier airline of the United Kingdom, based in Waterside, near its main hub at London Heathrow Airport. British Airways is the largest airline in the UK based on fleet size, international flights and international destinations...

, BP

BP

BP p.l.c. is a global oil and gas company headquartered in London, United Kingdom. It is the third-largest energy company and fourth-largest company in the world measured by revenues and one of the six oil and gas "supermajors"...

 and Unilever

Unilever

Unilever is a British-Dutch multinational corporation that owns many of the world's consumer product brands in foods, beverages, cleaning agents and personal care products....

. On June 9, 2005 the Group published a statement stating that there was a need to act on climate change and stressing the importance of market-based solutions. It called on governments to establish "clear, transparent, and consistent price signals" through "creation of a long-term policy framework" that would include all major producers of greenhouse gases. By December 2007 this had grown to encompass 150 global businesses.

Business in the UK have come out strongly in support of emissions trading as a key tool to mitigate climate change, supported by NGOs. However, not all businesses favor a trading approach. On December 11, 2008, Rex Tillerson

Rex Tillerson

Rex W. Tillerson is the current Chairman, President, and CEO of Exxon Mobil Corporation, positions previously held by Lee Raymond.-Education:...

, the CEO of Exxonmobil

ExxonMobil

Exxon Mobil Corporation or ExxonMobil, is an American multinational oil and gas corporation. It is a direct descendant of John D. Rockefeller's Standard Oil company, and was formed on November 30, 1999, by the merger of Exxon and Mobil. Its headquarters are in Irving, Texas...

, said a carbon tax

Carbon tax

A carbon tax is an environmental tax levied on the carbon content of fuels. It is a form of carbon pricing. Carbon is present in every hydrocarbon fuel and is released as carbon dioxide when they are burnt. In contrast, non-combustion energy sources—wind, sunlight, hydropower, and nuclear—do not...

 is "a more direct, more transparent and more effective approach" than a cap-and-trade program, which he said, "inevitably introduces unnecessary cost and complexity". He also said that he hoped that the revenues from a carbon tax would be used to lower other taxes so as to be revenue neutral.

The International Air Transport Association

International Air Transport Association

The International Air Transport Association is an international industry trade group of airlines headquartered in Montreal, Quebec, Canada, where the International Civil Aviation Organization is also headquartered. The executive offices are at the Geneva Airport in SwitzerlandIATA's mission is to...

, whose 230 member airlines comprise 93% of all international traffic, position is that trading should be based on “benchmarking,” setting emissions levels based on industry averages, rather than “grandfathering,” which would use individual companies’ previous emissions levels to set their future permit allowances. They argue grandfathering “would penalise airlines that took early action to modernise their fleets, while a benchmarking approach, if designed properly, would reward more efficient operations".

Measuring, reporting, verification (MRV)

An emissions trading system requires measurements at the level of operator or installation. These measurements are then reported to a regulator. For greenhouse gases all trading countries maintain an inventory of emissions at national and installation level; in addition, the trading groups within North America maintain inventories at the state level through The Climate Registry

The Climate Registry

The Climate Registry is a nonprofit collaboration between North American states, provinces, territories, and Native Sovereign Nations to record and track the greenhouse gas emissions of businesses, municipalities and other organisations...

. For trading between regions these inventories must be consistent, with equivalent units and measurement techniques.

In some industrial processes emissions can be physically measured by inserting sensors and flowmeters in chimneys and stacks, but many types of activity rely on theoretical calculations for measurement. Depending on local legislation, these measurements may require additional checks and verification by government or third party auditors, prior or post submission to the local regulator.

Enforcement

Another significant, yet troublesome aspect is enforcement. Without effective MRV and enforcement the value of allowances is diminished. Enforcement can be done using several means, including fines or sanctioning

Sanctions (law)

Sanctions are penalties or other means of enforcement used to provide incentives for obedience with the law, or with rules and regulations. Criminal sanctions can take the form of serious punishment, such as corporal or capital punishment, incarceration, or severe fines...

 those that have exceeded their allowances. Concerns include the cost of MRV and enforcement and the risk that facilities may be tempted to mislead rather than make real reductions or make up their shortfall by purchasing allowances or offsets from another entity. The net effect of a corrupt reporting system or poorly managed or financed regulator may be a discount on emission costs, and a (hidden) increase in actual emissions.

According to Nordhaus (2007, p. 27), strict enforcement of the Kyoto Protocol is likely to be observed in those countries and industries covered by the EU ETS. Ellerman and Buchner (2007, p. 71) commented on the European Commission's (EC's) role in enforcing scarcity of permits within the EU ETS. This was done by the EC's reviewing the total number of permits that member states proposed that their industries be allocated. Based on institutional and enforcement considerations, Kruger et al. (2007, pp. 130–131) suggested that emissions trading within developing countries might not be a realistic goal in the near-term. Burniaux et al.. (2008, p. 56) argued that due to the difficulty in enforcing international rules against sovereign states, development of the carbon market would require negotiation and consensus-building.

Criticism

Emissions trading has been criticised for a variety of reasons.

In the popular science magazine New Scientist

New Scientist

New Scientist is a weekly non-peer-reviewed English-language international science magazine, which since 1996 has also run a website, covering recent developments in science and technology for a general audience. Founded in 1956, it is published by Reed Business Information Ltd, a subsidiary of...

, Lohmann (2006) argued that trading pollution allowances should be avoided as a climate change policy. Lohman gave these reasons for this view. First, global warming will require more radical change than the modest changes driven by previous pollution trading schemes such as the US SO₂ market. Global warming requires "nothing less than a reorganisation of society and technology that will leave most remaining fossil fuels safely underground." Carbon trading schemes have tended to reward the heaviest polluters with 'windfall profits' when they are granted enough carbon credits to match historic production. Carbon trading encourages business-as-usual as expensive long-term structural changes will not be made if there is a cheaper source of carbon credits. Cheap "offset" carbon credits are frequently available from the less developed countries, where they may be generated by local polluters at the expense of local communities.

Lohmann (2006b) supported conventional regulation, green taxes, and energy policies that are "justice-based" and "community-driven." According to Carbon Trade Watch (2009), carbon trading has had a "disastrous track record." The effectiveness of the EU ETS was criticized, and it was argued that the CDM had routinely favoured "environmentally ineffective and socially unjust projects."

Annie Leonard

Annie Leonard

Annie Leonard is an American proponent of sustainability and critic of excessive consumerism. She is most known for her controversial animated film The Story of Stuff about the life-cycle of material goods.-Biography:...

 provided a critical view on carbon emissions trading in her 2009 documentary The Story of Cap and Trade. This documentary emphasized three factors: unjust financial advantages to major pollutors resulting from free permits, an ineffectiveness of the system caused by cheating in connection with carbon offset

Carbon offset

A carbon offset is a reduction in emissions of carbon dioxide or greenhouse gases made in order to compensate for or to offset an emission made elsewhere....

s and a distraction from the search for other solutions.

Offsets

Forest campaigner Jutta Kill (2006) of European environmental group FERN

FERN

FERN is a Dutch foundation created in 1995. It is an international non-governmental organization to keep track of the EU’s involvement in forests and to co-ordinate NGO activities at the European level...

 argued that offsets for emission reductions were no substitute for actual cuts in emissions. Kill stated that "[carbon] in trees is temporary: Trees can easily release carbon into the atmosphere through fire, disease, climatic changes, natural decay and timber harvesting."

Supply of permits

Regulatory agencies run the risk of issuing too many emission credits, which can result in a very low price on emission permits (CCC, 2008, p. 140). This reduces the incentive that permit-liable firms have to cut back their emissions. On the other hand, issuing too few permits can result in an excessively high permit price (Hepburn, 2006, p. 239). This is one of the arguments in favour of a hybrid instrument, that has a price-floor, i.e., a minimum permit price, and a price-ceiling, i.e., a limit on the permit price. A price-ceiling (safety value) does, however, remove the certainty of a particular quantity limit of emissions (Bashmakov et al.., 2001).

Incentives

Emissions trading can result in perverse incentive

Perverse incentive

A perverse incentive is an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers. Perverse incentives are a type of unintended consequences.- Examples :...

s. If, for example, polluting firms are given emission permits for free ("grandfathering"), this may create a reason for them not to cut their emissions. This is because a firm making large cuts in emissions would then potentially be granted fewer emission permits in the future (IMF, 2008, pp. 25–26). This perverse incentive can be alleviated if permits are auctioned, i.e., sold to polluters, rather than giving them the permits for free (Hepburn, 2006, pp. 236–237).

On the other hand, allocating permits can be used as a measure to protect domestic firms who are internationally exposed to competition (p. 237). This happens when domestic firms compete against other firms that are not subject to the same regulation. This argument in favour of allocation of permits has been used in the EU ETS, where industries that have been judged to be internationally exposed, e.g., cement and steel production, have been given permits for free (4CMR, 2008).

Auctioning

The revenues from auctioning go to the government. These revenues could, for example, be used for research and development of sustainable technology. Alternatively, revenues could be used to cut distortionary taxes, thus improving the efficiency of the overall cap policy (Fisher et al.., 1996, p. 417).

Distributional effects

The Congressional Budget Office

Congressional Budget Office

The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....

 (CBO, 2009) examined the potential effects of the American Clean Energy and Security Act

American Clean Energy and Security Act

The American Clean Energy and Security Act of 2009 was an energy bill in the 111th United States Congress that would have established a variant of an emissions trading plan similar to the European Union Emission Trading Scheme...

 on US households. This Act relies heavily on the free allocation of permits. The Bill was found to protect low-income consumers, but it was recommended that the Bill be changed to be more efficient. It was suggested that the Bill be changed to reduce welfare provisions for corporations, and more resources be made available for consumer relief.

See also

• Acid Rain Retirement Fund
  Acid Rain Retirement Fund
  The Acid Rain Retirement Fund is an all-volunteer, non-profit environmental educational organization dedicated to reducing pollution by purchasing and “retiring” marketable sulfur dioxide emissions allowances issued by the U.S. Environmental Protection Agency’s Acid Rain Program. A.R.R.F. was...
  
  
• Asia-Pacific Emissions Trading Forum
  Asia-Pacific Emissions Trading Forum
  The Asia-Pacific Emissions Trading Forum is an information service and business network dealing with domestic and international developments in emissions trading policy in the Asia-Pacific region. The AETF was originally called the Australasian Emissions Trading Forum, and was founded in 1998...
  
  
• AP 42 Compilation of Air Pollutant Emission Factors
  AP 42 Compilation of Air Pollutant Emission Factors
  The AP 42 Compilation of Air Pollutant Emission Factors, was first published by the U.S. Public Health Service in 1968. In 1972, it was revised and issued as the second edition by the U.S. Environmental Protection Agency . In 1985, the subsequent fourth edition was split into two volumes...
  
  
• Cap and Share
  Cap and Share
  Cap and Share was originally developed by Feasta and is a regulatory and economic framework for controlling the use of fossil fuels in relation to climate stabilisation...
  
  
• Cap and Dividend
  Cap and dividend
  Cap and Dividend is a market-based trading system which retains the original capping method of cap and trade, but also includes compensation for energy consumers...
  
  
• Carbon credit
  Carbon credit
  A carbon credit is a generic term for any tradable certificate or permit representing the right to emit one tonne of carbon dioxide or the mass of another greenhouse gas with a carbon dioxide equivalent equivalent to one tonne of carbon dioxide....
  
  
• Carbon emissions reporting
  Carbon emissions reporting
  Businesses worldwide face pressure to reduce the impact their activities have upon the environment, and in particular the volume of greenhouse gases they produce. In the United Kingdom, Department for Environment, Food and Rural Affairs has described climate change as the "greatest environmental...
  
  
• Carbon finance
  Carbon finance
  Carbon finance is a new branch of Environmental finance. Carbon finance explores the financial implications of living in a carbon-constrained world, a world in which emissions of carbon dioxide and other greenhouse gases carry a price....
  
  
• Emission standard
  Emission standard
  Emission standards are requirements that set specific limits to the amount of pollutants that can be released into the environment. Many emissions standards focus on regulating pollutants released by automobiles and other powered vehicles but they can also regulate emissions from industry, power...
  
  
• Energy law
  Energy law
  Energy laws govern the use and taxation of energy, both renewable and non-renewable. These laws are the primary authorities related to energy...
  
  
• Flexible Mechanisms
  Flexible Mechanisms
  Flexible mechanisms, also sometimes known as Flexibility Mechanisms or Kyoto Mechanisms), refers to Emissions Trading, the Clean Development Mechanism and Joint Implementation. These are mechanisms defined under the Kyoto Protocol intended to lower the overall costs of achieving its emissions targets...
  
  
• Green certificate
  Green certificate
  A Green Certificate - terminology used in Europe - also known as Renewable Energy Certificates in the USA, are a tradable commodity proving that certain electricity is generated using renewable energy sources. Typically one certificate represents generation of 1 Megawatthour of electricity...
  
  
• Green investment scheme
• Individual and political action on climate change
  Individual and political action on climate change
  Individual and political action on climate change can take many forms, most of which have the ultimate goal of limiting and/or reducing the concentration of greenhouse gases in the atmosphere, toward avoiding dangerous climate change.-Political action:...
  
  
• Low-carbon economy
  Low-carbon economy
  A Low-Carbon Economy or Low-Fossil-Fuel Economy is an economy that has a minimal output of greenhouse gas emissions into the environment biosphere, but specifically refers to the greenhouse gas carbon dioxide...
  
  
• Low carbon power generation / Renewable energy
  Renewable energy
  Renewable energy is energy which comes from natural resources such as sunlight, wind, rain, tides, and geothermal heat, which are renewable . About 16% of global final energy consumption comes from renewables, with 10% coming from traditional biomass, which is mainly used for heating, and 3.4% from...
  
  
• Mitigation of global warming
  Mitigation of global warming
  Climate change mitigation is action to decrease the intensity of radiative forcing in order to reduce the potential effects of global warming. Mitigation is distinguished from adaptation to global warming, which involves acting to tolerate the effects of global warming...
  
  
• Mobile Emission Reduction Credit (MERC)
  Mobile Emission Reduction Credit (MERC)
  A mobile emission reduction credit is an emission reduction credit generated within the transportation sector. The term “mobile sources” refers to motor vehicles, engines, and equipment that move, or can be moved, from place to place...
  
  
• Pigovian tax
  Pigovian tax
  A Pigovian tax is a tax levied on a market activity that generates negative externalities. The tax is intended to correct the market outcome. In the presence of negative externalities, the social cost of a market activity is not covered by the private cost of the activity...
  
  
• Public Smog
  Public Smog
  Public Smog is an "atmospheric park" created by San Francisco-based artist Amy Balkin and her supporters through the use of financial, political, and legal methods. The goal of Public Smog is to "highlight the complexities and contradictions of current environmental protocols." .-The Park:The...
  
  
• Tradable smoking pollution permits
  Tradable smoking pollution permits
  Tradable smoking pollution permits were proposed by the economists Robert Haveman and John Mullahy of the University of Wisconsin–Madison as an alternative to smoking bans to solve the problem of cigarette-smoking "externalities" in public bars and restaurants...
  
  

External links

• Dr. Daniel Fine of the New Mexico Center for Energy Policy on Cap and Trade
• Emissions Trading and CDM – International Energy Agency
  International Energy Agency
  The International Energy Agency is a Paris-based autonomous intergovernmental organization established in the framework of the Organisation for Economic Co-operation and Development in 1974 in the wake of the 1973 oil crisis...
  
   website
• Greenhouse Gas Emissions Trading – Organisation for Economic Co-operation and Development
  Organisation for Economic Co-operation and Development
  The Organisation for Economic Co-operation and Development is an international economic organisation of 34 countries founded in 1961 to stimulate economic progress and world trade...
  
   website
• US EPA's Acid Rain Program
• Illinois Emissions Reduction Market System
• Texas Emissions Banking and Trading program
• "The Making of a Market-Minded Environmentalist", article by Fred Krupp
  Fred Krupp
  Fred Krupp is the president of Environmental Defense Fund, a United States-based nonprofit environmental advocacy group.Krupp is a graduate of Yale University with a law degree from the University of Michigan and has taught environmental law at both schools....
  
   in Strategy+Business
  Strategy+Business
  strategy+business is a business and management magazine published by Booz & Company, and edited by Art Kleiner. Prior to the separation of Booz & Company and Booz Allen Hamilton in 2008, strategy+business was published by Booz Allen Hamilton...
  
   (registration reqd) that articulates some of the reasoning and history behind emissions trading in California
  California
  California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
  
  
• International Emissions Trading Association
• EU-ETS for airlines