Greenhouse gases can contribute to global warming regardless
of their country of origin. To reduce the impacts, it doesn't
matter which region of the world cuts back on emissions, as long
as the overall amount across the globe falls.
That is the idea behind greenhouse gas emissions trading, which
places a cap on total emissions, allocates credits to individual
emitters and then allows them to buy or sell credits in a market
to meet their targets. These systems are set up within a cap-and-trade
program enacted by legislation of the state, country or region.
emissions trading markets operate in a similar manner: The regulating
body sets a cap on emissions and divides this into allocations
for each smaller division, a state for example. The state then
determines the levels each individual polluting company can emit.
Over time, the emissions allocations will decrease and emitters
will need to adjust their strategies under the new levels.
Trading programs are meant to provide a cost-effective and efficient
way to lower emissions by putting a price tag on each ton of greenhouse
gas released into the atmosphere. The price of an emission unit
is determined by supply and demand as with any other market commodity.
Under the system, companies must have enough credits to cover
their emissions at the end of a determined period.
Using a market-based system allows reductions to be made where
they are cheapest; Companies that find it difficult or expensive
to reach their targets can buy emissions credits from companies
that have more easily or cheaply reduced their emissions below
their assigned amount. It also encourages companies to develop
new technologies to avoid more expensive measures that may be
required in the future.
Compared to other emission reduction strategies, such as taxes
or a command-and-control approach that makes surpassing regulations
punishable by law, some experts say trading is the most economical
way because it gives companies the flexibility to choose how to
reach their target.
"Trading ... sets a price for carbon, and companies are
really good at minimizing their input costs. There is incentive
for companies to help the environment," said Janet Peace,
a senior research fellow at the Pew Center for Global Climate
Some programs allow companies to sponsor emissions reduction
projects outside of their sector to receive offset allowances
that count toward reaching their target. Offsets give companies
more opportunities to find cost reductions while still decreasing
the amount of overall greenhouse gases emissions.
The ideal trading program would be a large one, according to
Peace, because it would create more opportunities to find emissions
at a lower cost and make it easier to meet reduction requirements.
Cap-and-trade programs work best in sectors with a relatively
concentrated number of companies, such as power plants, heavy
industry and the pharmaceutical industry. Other sectors, such
as agriculture, transportation and forestry, emit greenhouse gases
but enforcing a trading system would be difficult because of the
obstacles to setting up an emissions registry, said John Pershing,
the director of Climate and Energy Program at World Resources
Institute, an environmental research group based in Washington,
Where trading programs exist
Currently an international trading system for greenhouse gas emissions
does not exist, nor does a nationwide program in the United States.
The most developed system in the world involves the European Union
and was modeled after the United States' cap-and-trade system
under the Clean Air Act to reduce nitrous oxide and sulfur dioxide
emissions responsible for reduce acid rain.
The European Union's Emissions Trading Scheme, established in
2003, is the first example of a regional market for carbon dioxide
emissions trading. While inspired to help member states achieve
their targets set in the Kyoto Protocol, the ETS is part of EU
law and would have gone into effect even if Kyoto had not been
ratified, said Danny Ellerman, the executive director of the Center
for Energy and Environmental Policy Research at the Massachusetts
Institute of Technology.
The Kyoto Protocol allows certain participating countries to
buy and sell some of their allowances to meet their emissions
targets. It also permits different domestic or regional trading
schemes to link to one another.
The ETS is still in an experimental phase and the environmental
impact are still unclear but observers say the program has had
a positive influence. "Companies are incorporating a positive
price for carbon into their production and pricing decisions whereas
they were not before," said Ellerman.
Potential in the United States
In the United States, there several different legislative proposals
for nationwide greenhouse gas cap-and-trade programs with varying
approaches. Environmentalists agree that any policy on climate
change should include a cap-and-trade program that establishes
an emissions market.
said there are two basic approaches to establishing a nationwide
program in the United States: creating a federal program that
would use a common system in each state or allowing states to
make their own programs and trade credits among themselves as
countries trade international currencies.
The number of states interested in creating a cap-and-trade program
is growing and some have already taken steps to set up statewide
or regional programs.
In the Northeast, the Regional Greenhouse Gas Initiative would
establish the first collective effort in America to adopt mandatory
controls for carbon dioxide emissions. The governors of Connecticut,
Delaware, Maine, New Hampshire, New Jersey, New York and Vermont
signed a memorandum to create a cap-and-trade program covering
all power plants that includes a trading program.
In April 2006, Maryland passed a law requiring the state's participation
as part of its Healthy Air Act. Washington, D.C., Massachusetts,
Pennsylvania, Rhode Island, the Eastern Canadian Provinces and
New Brunswick are observers in the process and may join later.
The RGGI cap will be set at current emissions levels when the
program begins in 2009 and reduce emissions 10 percent by 2019.
It allows companies to use offset allowances.
California, Oregon and Washington also are developing trading
systems as part of their climate change policy.
Critics of cap-and-trade
Not all agree that the current cap-and-trade proposals are
the best way to reduce greenhouse gas emissions. Ellerman divides
critics of emissions trading into two groups: those that oppose
putting a price on carbon and those that prefer taxes or a command-and-control
approach over emissions trading.
"In the U.S. at least, I think it is fair to say that companies
would prefer emissions trading to any other alternative if they
are going to be required to take action to address some environmental
problem," wrote Ellerman in an e-mail.
The complexity of any trading program makes it difficult for
people understand and also difficult for them to follow. It requires
setting up a detailed registry of emissions and a complicated
system of accounting.
Because trading works in some sectors and not others, there are
complaints about the fairness of regulating certain sectors such
as power plants when greenhouse emissions come from the entire
economy. Environmentalists and politicians are pushing for trading
programs as part of a broad spectrum of policies tailored to each
Another objection is that trading allows emitters to pollute
instead of forcing them to cut back on emissions entirely. The
counter argument is that companies are currently polluting for
free. "Politically, you can't jump in with major restraints
and put people out of business. There's a balance between a growing
economy and reducing emissions," said Peace. "Cap-and-trade
puts a price on it but some people have difficulty pricing the