General Information about Emissions Trading
Emissions trading harks back to an old concept in environmental protection. The use of natural resources - for the provision of goods as well as the release of waste products – should be reflected in monetary terms. From a climate protection perspective, the emission of greenhouse gases which are the cause of global temperature rise (greenhouse effect), is a use of natural resources as defined above. In emission trading, emitters of climate-damaging carbon dioxide (CO2) must be in possession of the relevant allowances. If an emitter does not possess a sufficient number of allowances, they can either reduce their emissions by using climate-friendly technology or acquire additional allowances. The total number of available allowances, however, remains limited. Thus, the additional purchase of allowances is only possible if a reduction of CO2 output has been achieved elsewhere..
The idea is very simple. On a global scale, it does not matter where greenhouse gas emissions are reduced, as long as they are reduced at all.
On 01.01.2005, the European Union introduced emissions trading for certain industries within the community. The emissions trading system is an economic tool to reduce the emission of the climate-damaging gas CO2. A ton of CO2 is valued at a price which is determined by the (trading) market. Thus, emissions will be reduced where this can be done most cost-effectively.
Simplified diagram of emissions trading
Source: German Emissions Trading Authority (DEHSt) at the Federal Environment Agency
Emissions trading ensures that climate protection measures are taken wherever they can be carried out most cost-effectively, thus combining ecologic effectiveness with economic efficiency. Reduction targets are set for industry sectors and individual plants by the allocation of emission allowances. These allowances are tradable like credits. If a company reaches the set targets through cost-effective CO2 reduction, it can sell the surplus allowances on the market. Alternatively, if emission reduction is deemed more expensive, a company can buy additional allowances on the market. However, if a company does not fulfil its obligations to reduce its emissions, it will be heavily fined. During the first trading phase (2005–2007), the fine is 40 Euros per ton of carbon dioxide emissions. In addition, the required reduction in emissions must be achieved. As an example, companies A and B are both required to reduce their emissions by ten percent. While for company B the investment needed to achieve this is relatively high, it is much lower for company A. It makes therefore economic sense for company A to reduce its emissions by 20 percent and sell the surplus emission allowances to company B which has opted not to reduce its emissions. The climate protection target has been reached, as the overall emission reduction of companies A and B is ten percent.
View an introductory film on emissions trading
The Emission Trading Scheme by the Norwegian Climate and Pollution Agency