Emissions trading which is also known as cap and trade is an approach that is market based used for purposes of controlling pollution through provision of economic incentives for reduction in emission of pollutants. A central power (often government body) is mandated with the task of setting the limit or cap on the pollutant amount that should be emitted.
This limit is sold or in some cases allocated to firms usually in form of emission permits that represent the appropriate discharge or emit. Firms are supposed to have a couple of permits that are equivalent to the level of emissions they make. The permits number should be more than the set limit or cap that limits average emissions to the stated level. Firms interested in increasing their emissions volume must be willing to buy the permits from those in need of few permits.
Permit transfer is known as trade and in effect, buyers pay a polluting charge while sellers are rewarded for their reduced emission. Consequently, those in a position to reduce emissions do so cheaply and they are able to achieve reduction of pollution at the lowest possible cost to the society.
Emissions’ trading is preferable because:
- It is an economically efficient strategy for attaining the desired emission target or reduction cap
- It is designed specifically to deliver an environmental objective.
- It delivers a price signal that is clear and against which abatement investments are measured.
There are various air pollutant programs that are active. For instance in the case of greenhouse gases, the European Union Emission Trading Scheme is the largest and its purpose is that of avoiding climate change that is dangerous. In the US, a national market is available for the purpose of reducing acid rain and numerous regional nitrogen oxides markets. Other pollutant markets however are often small and far localized.
The major goal of any emissions trading is minimization of costs associated with meeting set emissions cap or target. Usually, the cap is a limit that is enforceable and it is lowered over certain duration with the aim of reaching reduction target at a national level. In some of the systems, the proportion of traded permits should be periodically retired leading to net emissions reduction over time.
In most of the emissions trading systems, organizations that don’t pollute and with no obligations can also take part in trading. Therefore, environmental groups have the right to buy and retire emission permits driving the price of those permits remaining high in accordance to demand law. Corporations might retire allowances prematurely as well by donating such to non-profit entities and hence be eligible for tax reductions.
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