What is Emissions Trading?

Emissions trading is a market based scheme for environmental improvement that allows parties to buy and sell permits for emissions or credits for reductions. Emissions trading allows established emission goals to be met in a cost effective way, letting the market determine the lowest cost pollution control opportunities. Emissions trading can work within a region or country or on a global basis.

Where are emissions trading schemes operating?

Emissions trading schemes are now operating in many countries and across a range of pollutants.

  • US SO2 “Acid Rain” Trading
    Began in 1995
    Significant emissions reduction with > 30% savings vs non-flexible methods
  • US NOx Trading Programs
    California “RECLAIM” SO2 & NOx, began 1994
    Northeastern states, began 1999
    Texas began 2002
    Expansion of NE states program (NOx SIP Call) to Midwest & SE, 2004
  • UK ETS
    Began in 2002
  • Chicago Climate Exchange
    Voluntary GHG trading system; began late 2003
  • EU ETS
    Begins January, 2005

Trading schemes

What are the advantages of emissions trading?

Emissions trading can significantly reduce the cost of improving air quality.

If Governments, or companies, want to reduce emissions, then providing an economic incentive improves compliance and benefits the environment.

Emissions trading lowers the cost to participants and gives business flexibility choose the form of compliance

Is there any proof that emissions trading is effective?

There is early evidence that emissions trading works. For example, a highly successful emissions market was established in the United States in the 1990s to reduce acid rain causing emissions of SOx. This scheme gave power plant operators the flexibility to choose the most cost effective means to reduce emissions.

Over 400 power plants were able to comply with their emissions targets to cut acid rain at a far less cost than anticipated. Between 1995 and 1997, SOx emissions from these plants were reduced by 30% more than originally required under the Clean Air Act. This trading scheme will run until 2010, but this initial evidence indicates that trading is an effective tool in terms of cost savings and environmental benefit.