Question

Use a graph to explain how an emission-trading scheme operates.    

Answer 1

Emissions trading is a market-based mechanism aimed at reducing global emissions in a cost-effective manner. Under the Protocol, trading takes place among industrialized countries, which must keep detailed emissions inventories and meet legally binding targets. A target is essentially a ceiling up to which countries can emit greenhouse gases. These targets can be divided into units, representing one or more tons of emissions.

A Party on course to meet its target may either sell spare (un-emitted) units to another Party or bank these allowances for a future date. A Party in danger of exceeding its target has a number of options. It may reduce its emissions, purchase surplus units on the market, or earn credit units by creating or expanding sinks such as forests that absorb carbon.

Emissions trading creates a market where units acquire value according to supply and demand. More stringent targets increase the demand for spare units and decrease their supply. This creates incentives for countries to improve energy efficiency and invest in renewable energy technologies. EU ETS, is currently the world’s largest system. It operates in all 28 EU countries plus Iceland, Liechtenstein and Norway, limiting emissions from more than 11,000 heavy users of energy including power stations and industrial plants, and airlines operating between the ETS member countries. In total, it covers around 45% of the EU’s greenhouse gas emissions. Under the third phase of the ETS, which runs from 2013–20, a single, centralised cap covering the whole EU was set.