Emissions trading

Emissions trading (or cap and trade) is an administrative approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. In such a plan, a central authority (usually a government agency) sets a limit or cap on the amount of a pollutant that can be emitted. Companies or other groups that emit the pollutant are given credits or allowances which represent the right to emit a specific amount. The total amount of credits cannot exceed the cap, limiting total emissions to that level. Companies that pollute beyond their allowances must buy credits from those who pollute less than their allowances. As a result, the buyer is being fined for polluting, while the seller is being rewarded for having reduced emissions. The more firms that need to buy credits, the higher the price of credits becomes -- which makes reducing emissions cost-effective in comparison.

The overall goal of an emissions trading plan is to reduce pollution. In some cases, the cap may be lowered over time, which makes allowances more expensive. In many cap and trade systems, organizations which do not pollute may also buy credits. Environmental groups that purchase and retire pollution credits reduce emissions and raise the price of the remaining credits as per the law of demand.

Because emissions trading uses free markets to determine how to deal with the problem of pollution, it is often described as an example of effective free market environmentalism. While the cap is usually set by a political process, individual companies are free to choose how or if they will reduce their emissions. Moreover, the government does not need to regulate how much each individual company emits, making cap and trade a very cost-effective method of controlling pollution on a large scale.

Allowances may be given away free (grandfathering), or through auctioning. In the first case an allocation plan must be set up, which is usually based on the amount of emissions released in the past.

The European Union Emission Trading Scheme (EU ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world. Under the scheme, each participating country proposes a National Allocation Plan (NAP) including caps on greenhouse gas emissions for power plants and other large point sources. The NAP must subsequently be approved by the European Commission.

The scheme, in which all 25 member states of the European Union participate, commenced operation on 1 January 2005. In its first year, 362 million tonnes of CO2 were traded on the market for a sum of €7.2 billion.

Allowances for Germany are traded at the 'Leipziger Strombörse'.

In the first phase (2005-2007), the EU ETS includes some 12,000 installations, representing approximately 45% of EU CO2 emissions, covering energy activities (combustion installations with a rated thermal input exceeding 20 MW, mineral oil refineries, coke ovens), production and processing of ferrous metals, mineral industry (cement clinker, glass and ceramic bricks) and pulp and paper industries.

The second phase (2008-12) is to cover not only CO2, but all greenhouse gases. Moreover, CDM and JI credits are expected to be introduced as well as the aviation sector.

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Quelle: Based on "Emissions trading" Wikipedia, The Free Encyclopedia.