Emissions Trading Schemes
Emissions trading is emerging as a key instrument in the drive to reduce greenhouse gas emissions. The rationale behind emission trading is to ensure that the emission reductions take place where the cost of the reduction is lowest thus lowering the overall costs of combating climate change.
Emissions Trading is particularly suited to the emissions of greenhouse gases, the gases responsible for global warming, which have the same effect wherever they are emitted. This allows the Government to regulate the amount of emissions produced in aggregate by setting the overall cap for the scheme but gives companies the flexibility of determining how and where the emissions reductions will be achieved. By allowing participants the flexibility to trade allowances the overall emissions reductions are achieved in the most cost-effective way possible.
Participating companies are allocated allowances, each allowance representing a tonne of the relevant emission, in this case carbon dioxide equivalent. Emissions trading allows companies to emit in excess of their allocation of allowances by purchasing allowances from the market . Similarly, a company that emits less than its allocation of allowances can sell its surplus allowances. In contrast to regulation which imposes emission limit values on particular facilities, emissions trading gives companies the flexibility to meet emission reduction targets according to their own strategy; for example by reducing emissions on site or by buying allowances from other companies who have excess allowances. The environmental outcome is not affected because the amount of allowances allocated is fixed.
Further information
| Carbon Reduction Commitment | The Carbon Reduction Commitment (CRC) scheme, will apply mandatory emissions trading to cut carbon emissions from large commercial and public sector organisations. |
| Carbon offsetting | Offsetting is a way of compensating for the emissions produced with an equivalent carbon dioxide saving. |
| Personal carbon allowances | Emissions trading schemes applied to individuals are variously known as Domestic Tradable Quotas, Tradable Energy Quotas, Personal Carbon Trading, and Personal Carbon Allowances. |
Page last modified:
28 July 2008
Page published: 8 September 2003