Cap and Trade (Emission Trading Scheme) for dummies

Emissions trading Scheme, also known as “cap and trade”, is a strategy to reduce greenhouse gas emissions.

The origins of similar pollution control programs date back to the 1980s and 1990s, when were successfully used in the United States to phase out lead in gasoline and to reduce emissions of sulfur dioxide and nitrous oxide to combat acid rain.

In this case, companies are encouraged to reduce emissions, through a system of permits or quotas for each unit of emissions allowed within an established maximum limit. Businesses can obtain permits from the government or through exchanges with other companies. The government can choose to give away the permits for free or auction them off.

The scheme.

Companies that anticipate that they do not have sufficient permits must either reduce their emissions or purchase permits from another company. For a given permit price, some companies will find it easier, or cheaper, to reduce emissions than others and sell the permits. If there are too many such firms, the price of permits, the total number of which is fixed in advance by the cap, will decrease. This will certainly lead some companies to reduce their emissions reduction efforts. Only when the price of permits will be fair, the number of permits offered for sale by companies that can reduce emissions at low cost will be equal the number of permits requested by companies for which emission reduction is expensive. This trading process guarantees a single price for all companies coordinating their activities and reduces emissions to the level allowed under the roof in a cost-effective way.

Of course, there is no reason to expect an authorization price to remain stable. Permit prices will fluctuate, becoming more expensive when demand is high than supply and cheaper when demand is lower.

The only real resolution to climate change.

This system has been mainly studied on the basis of scientific evidence that this causes both climate change and greenhouse gas emissions. Therefore, trading emission allowances is a fundamental part of limiting climate damage. This would lead to the achievement of the Paris agreement goal of keeping the temperature rise below 2 ° C in the current century.

This predicts that emissions in the sectors it covers will be 21% lower in 2020 than in 2005. Research has also shown that the EU Emissions Trading System has helped foster innovation in low-carbon technologies. carbon as renewable energy sources and energy efficiency, one of the original objectives of the system. Increased use of these technologies also helps reduce greenhouse gas emissions.

What is the current situation in the world?

The European Union Emissions Trading System is currently the largest system in the world. It operates in all 28 EU countries plus Iceland, Liechtenstein and Norway, limiting the emissions of more than 11,000 heavy energy users, including power plants and industrial plants, and airlines operating between ETS member countries. In total, it covers around 45% of the EU’s greenhouse gas emissions. As part of the third phase of the ETS, which runs from 2013 to 2020, a single centralized ceiling has been set covering the whole of the EU. This limit will be reduced by at least 1.74% per year until 2020 in order to achieve further emission reductions at a faster pace.

The International Carbon Action Partnership (ICAP) What is the ESA ”Earth digital twin” estimates that emissions trading now covers 15% of global emissions.

China officially launched a major national emissions trading scheme in December 2017 after experimenting with seven schemes at the local government level. It plans to introduce the national scheme first in the energy sector, with full implementation by 2020, to become the largest ETS in the world. The scheme has been lauded for its scope and ambition, which could mean China’s emissions will start to decline before 2030.

To deepen the topic:

  1. Data analysis will save the earth
  2. What is the ESA ”Earth digital twin”?
  3. Are space solar power stations on the horizon?

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