Emissions Trading Scheme

Emissions Trading Scheme
Name	Emissions Trading Scheme
Caption	Emissions trading permit auction
Type	Market-based environmental policy
Established	Varies by jurisdiction
Jurisdiction	International, national, regional

Emissions Trading Scheme is a market-based policy instrument for reducing greenhouse gas emissions through tradable permits that cap aggregate emissions and allocate allowances among firms, utilities, industries and other covered entities. ETS programs link economic actors with regulatory institutions to create scarcity of emission rights, incentivizing investment in renewable energy, energy efficiency, carbon capture and storage, and low-carbon transportation technologies. Prominent examples include schemes developed in response to international agreements and regional initiatives addressing climate change.

Overview

An ETS sets a binding cap on total emissions for covered sources, issues emissions allowances, and establishes secondary markets for trading permits among covered entities such as power stations, manufacturing plants, airlines and municipalities. Tradable permits can be allocated by auctioning through government agencies like European Commission entities or by free allocation to incumbents such as BP, Shell, ExxonMobil and PepsiCo to address competitiveness concerns. Market infrastructure often involves exchanges and registries managed by organizations like Intercontinental Exchange, European Energy Exchange, California Air Resources Board and Registry of Greenhouse Gas Emissions. Linking ETS programs across jurisdictions can involve treaties or agreements akin to negotiations at United Nations Framework Convention on Climate Change, Kyoto Protocol mechanisms and Paris Agreement coordination.

History and development

Early roots trace to emissions trading proposals by economists and policy-makers reacting to pollution control challenges like the Acid Rain Program and sulfur dioxide trading under the Clean Air Act Amendments of 1990. The first large-scale ETS was established by the European Union as part of the EU Emissions Trading System following directives adopted in the early 2000s, influenced by conferences such as Rio Earth Summit and negotiations at United Nations Conference on Environment and Development. Subsequent national and regional schemes emerged in jurisdictions including New Zealand, Japan, South Korea, Switzerland, China, and subnational examples like California and the Regional Greenhouse Gas Initiative. Political developments involving leaders and institutions such as Angela Merkel, Barack Obama, Xi Jinping, David Cameron, Kevin Rudd and agencies like Ministry of the Environment (Japan) shaped adoption timelines and regulatory design choices.

Design and mechanisms

Key design elements include cap setting by legislatures or regulatory bodies like European Parliament committees, allowance allocation methods used by ministries such as Ministry for the Environment (New Zealand), allowance banking and borrowing provisions referenced in proposals from Intergovernmental Panel on Climate Change reports, and price stabilization mechanisms similar to reserve auctions advocated by economists including William Nordhaus and Nicholas Stern. Compliance tools integrate monitoring, reporting and verification systems tied to standards from International Organization for Standardization and verification bodies like Det Norske Veritas. Market operations intersect with financial instruments and participants such as Goldman Sachs, Deutsche Bank, Morgan Stanley and carbon offset projects registered under frameworks like Clean Development Mechanism and regional registries administered by organizations akin to World Bank initiatives.

Economic and environmental impacts

Analyses draw on empirical studies by institutions including OECD, International Monetary Fund, National Bureau of Economic Research, United Nations Environment Programme and academic centers at Harvard University, London School of Economics, Massachusetts Institute of Technology. ETS programs affect prices faced by industrial corporations such as ArcelorMittal, Tata Steel, Siemens and BHP, triggering investments in renewable energy firms like Ørsted, Vestas, First Solar and Tesla, Inc.. Environmental outcomes relate to emissions trajectories assessed against scenarios from Intergovernmental Panel on Climate Change reports and modeled through tools developed at Stanford University, Princeton University and Potsdam Institute for Climate Impact Research. Distributional effects engage policy debates involving labor unions such as Trades Union Congress and consumer advocacy groups like Which? and Consumers International.

Implementation and compliance

Operationalization requires legal frameworks enacted by parliaments and ministries such as Parliament of the United Kingdom, United States Congress, National People's Congress (China), and administrative oversight by regulators including Environment Agency (England) and EPA. Compliance cycles rely on reporting standards, audits by firms like PricewaterhouseCoopers and KPMG, and enforcement actions that may involve litigation in courts such as European Court of Justice and national judiciaries. Auction design, revenue use and transitional assistance involve finance ministries like HM Treasury, US Department of the Treasury, Ministry of Finance (Japan) and central banks when addressing macroeconomic impacts through institutions like Bank of England.

Criticisms and challenges

Critiques draw on concerns about permit overallocation in early phases of the EU ETS, price volatility highlighted by traders and analysts from Bloomberg and Reuters, and potential carbon leakage for exposed sectors like steelmaking and cement referenced by trade organizations including World Steel Association and International Cement Review. Political economy obstacles include lobbying by firms such as Monsanto and Cargill, electoral backlashes seen in policy debates involving leaders like Emmanuel Macron and movements such as the Yellow Vests protests. Technical challenges center on monitoring emissions from sectors like aviation overseen by International Civil Aviation Organization and shipping where bodies like International Maritime Organization engage in parallel regulation.

Regional and national examples

Prominent systems include the EU Emissions Trading System, the California Cap-and-Trade Program linked with Québec via an agreement negotiated by provincial and state governments, the New Zealand Emissions Trading Scheme, the national program of China launched with pilots in cities like Shenzhen and provinces like Guangdong, the Korean Emissions Trading Scheme, and the Swiss ETS aligned with neighboring European frameworks. Sectoral and subnational initiatives include the Regional Greenhouse Gas Initiative in the northeastern United States, voluntary markets involving organizations such as Verra and Gold Standard, and cap-and-trade proposals debated in bodies like Australian Parliament and state legislatures exemplified by policy discourse in Victoria (Australia) and Texas.

Category:Climate policy