Background, development and issues as well as adverse effects associated with implementation of emissions trading schemes are considered. Carbon markets origins and progression are also discussed.

Background

Emissions trading (ETS) or, more generally, tradable permit systems, is another economic incentive instrument aimed at reducing pollution. Similar to taxes, emissions trading is expected to set a price on pollution which would lead to a cost-effective internalisation of environmental externalities.

Tradable permit systems have been utilised to cope with diverse environmental problems such as air pollution, fisheries, water management, waste management and land-use since the 1970s. In the context of climate change, emissions trading has been regarded as a potential instrument for reducing GHG emissions since the early 1990s.

The advantages of an ETS are based on assumptions that are relatively similar to those available under environmental taxes. First of all, by buying emissions permits, polluters pay for damage to the environment and are thus forced to internalise externalities. Hence, an ETS, in the same way as taxes, forces polluters to consider the environmental costs of their business. An ETS, as an environmental tax, offers choice to polluters, whether to buy emissions permits or to reduce emissions, therefore facilitating flexibility in achieving any given emissions reduction.

Adverse effects

Economic incentive instruments have their advocates and opponents. However, economic incentive instruments are often regarded as more effective and efficient than direct regulations. Often, the main argument of policy makers to justify the resistance to economic incentive instruments is the fear of reduced competitiveness in the most affected economic sectors. Another concern is that of income distribution. These two potential adverse effects of economic instruments are significant impediments for policy makers.

Carbon markets

In 1997, the US proposed emissions trading as one of the mechanisms for the Kyoto Protocol. At a later stage of the negotiations, emissions trading was implemented by the Kyoto agreement, despite opposition from many parties. In the early 2000s, emissions trading for GHG reduction was introduced in Denmark, then in the EU and UK. Presently, there are a few national carbon markets.

Readings

1. Gumley, W. & Stoianoff, N.P. 2011, 'Carbon Pricing Options for a Post-Kyoto Response to Climate Change in Australia', Federal Law Review, vol. 39, pp. 131–159. Available at https://ssrn.com/abstract=2365665
2. OECD, 2008, Environmentally Related Taxes and Tradable Permit Systems in Practice. Available at http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?doclanguage=en&cote=com/env/epoc/ctpa/cfa(2007)31/final
3. K. P. Green, S. F. Hayward and Hasset K. A. 2007, Climate Change: Caps vs. Taxes. Available at http://www.aei.org/article/energy-and-the-environment/climate-change-caps-vs-taxes/