Emission trading

Emission trading that is, Cap and Trade is a market-based approach to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. A central authority or a regulator sets a limit/cap on the amount of a pollutant that can be emitted but does not decide what any particular source will emit. This cap is sold to firms in the form of emission 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 credits equivalents to their emissions. The total number of permits can not 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. This way, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions.

There are two main active trading programmes. For greenhouse gases the European Union Emission Trading Scheme is the largest programme and a National Market to reduce acid rain in United States.

Emissions trading schemes have great potential to lower pollution while minimizing costs for industries. The benefits of such schemes come from two sources. On the industry side, units are able to choose for themselves the cheapest way to reduce pollution. In comparison, traditional command- and-control regulations do not allow for differences across industries. Mandating the same standard everywhere will generally miss the best opportunities for abatement. On the regulatory side, an emissions trading scheme, once established, will provide a self- regulating system that makes pollution control more efficient. In the longer run, the reduced costs of compliance can also make it easier to introduce new regulations that increase environmental quality. Past experience with emissions trading, has shown that cap-and � trade is a robust way to achieve targeted reductions in emissions at a low cost.

Four areas are especially important for successful implementation of an emissions trading scheme.

Setting the Cap- The target for aggregate emissions from the sector where trading is introduced must be set to produce reasonable prices and emissions reductions.

Allocating Permits -The permits to emit must be distributed in an equitable way to build support for the scheme. In many successful cases this allocation has been made for free relative to baseline emissions, greatly reducing the cost of compliance for industries.

Monitoring - The quantity of emissions from each industrial plant must be reliably and continuously monitored with high integrity recognized by all sides.

Compliance - The regulatory framework must make industries confident that buying permits is the only reliable way to meet environmental obligations.