Emissions trading is a proposed economic solution to air pollution. In such a plan, government agencies set limits or "caps" on each pollutant. Groups that intend to exceed the limits may buy emissions credits from entities that are likely not to exceed the limits. One variation of this scheme is called a cap and trade system. Emissions trading is one of the solutions proposed by free-market environmentalism.
The idea is that a central authority will grant an allowance to entities based upon a measure of their need. For example an allowance to a country might be based upon total population. An industrial facility might be granted a license for its current actual emissions. If a given country of facility does not need all of its allowance, it may offer it for sale to another organization that has insufficient allowances for its emission production.
The United States began emissions trading after passage of the 1990 Clean Air Act, which authorized the Environmental Protection Agency to put a cap on how much Sulfur dioxide (which causes acid rain) the operator of a fossil-fueled plant was allowed to emit.
In New York State's proposed cap and trade program, the state would set an industry-wide "cap" on carbon dioxide emissions, lower than the current amount, and then give each power plant a target and a deadline. Companies that reduce emissions further than required could then "trade" emission credits with companies who cannot meet their goals. The concept, used with some success in the national Clean Air Act to reduce smog and acid rain emissions, is designed to reduce costs for the regulated businesses. (source: New York Sun)
The Kyoto Protocol will bind ratifying nations to a similar system, with the UNFCCC setting caps for each nation. Under the proposed treaty, nations that emit less than their quota of greenhouse gases will be able to sell emissions credits to polluting nations.
Critics of the Kyoto Protocol see it as a means of forcibly redistributing wealth from the United States to the Third World. This is because the U.S., which produces 25% of the world's greenhouse gas emissions, would likely exceed its quota and would have to buy emissions credits from nations such as China, India, and Russia.
Critics also argue that emissions trading does little to solve pollution problems as groups that do not pollute are granted emissions credits which they then sell. Some environmental groups are attempting to solve this problem by buying credits and refusing to use or sell them.
In private enterprise, emissions trading is very attractive because it does not harm industrial concerns, or require government subsidies. When the price per ton of emissions becomes high-enough, well-managed polluting enterprises can make a rational decision to invest in pollution control equipment, and sell part of their emissions licenses.
In some proposed systems, the government grants tax credits to enterprises. However, these are more expensive for governments, and far less popular for that reason.
Emissions trading is attractive to public-interest environmental organizations, because in an open market, they can purchase, and retire emissions licenses. This permanently reduces the total amount of pollution produced.
The main effect is to control a pollutant in a socially-controlled way. This will assure that the effects of humans on the environment are controlled, rather than accidental.
An important secondary effect is to disperse pollution sources. This occurs because the operators of polluting enterprises will naturally sell as many licenses as they can afford to. This is good, because at any given location, concentrations of a pollutant will be significantly less.
A final effect is that if the total permitted amounts are fixed or decreasing, public interest groups can decrease them further by purchasing licenses. The net effect is to drive total emissions toward zero with no economic harm to industry.
A critical part of emissions trading is that the amount of emissions must be fixed, or controlled in some socially-agreed fashion. Many people favor starting at the current level of emissions. It clearly can form no emergency for existing industrial concerns, and at the same time promises no new pollution.
The total of all allowances issued may be adjusted to an agreed reduction rate for the particular emission or pollutant. Thus, the central authority may control the emissions, and allow market forces to encourage countries to produce less of the emissions.
For example, less developed countries with relatively high populations, and lower pollution per head than western countries may sell their allowances to the industrialised west. However, as the supply is finite, the more that the west produces, the more that the additional allowances will cost them, until it becomes uneconomic to pollute, and more economic to convert to less environmentally harmful technologies.
Another critical part of the bargain is enforcement. Without effective enforcement, the licenses have no value. Two basic scheme exist.
In one, the regulators measure facilities, and fine or sanctions those that lack the licenses for their emissions. This scheme is quite expensive to enforce, and the burden falls on the agency, which then may need to collect special taxes. Another risk is that facilities may find it far less expensive to corrupt the inspectors than purchase emissions licenses. The net effect of a poorly financed or corrupt regulatory agency is a discount on the emissions licenses, and greater pollution.
In another, some other agency, usually a commercial agency licensed by the government, verifies that polluting facilities have licenses equal or greater than their emissions. Inspection of the certificates is performed in some automated fashion by the regulators, perhaps over the internet, or as part of tax collection. The regulators then audit licensed facilities chosen at random to verify that certifying agencies are acting correctly. This scheme is far less expensive, placing most regulation in the private sector. In addition, auditing can be performed on well-paid contracts by persons (such as university professors or antipollution activists) whose reputation is more valuable to them than any practical amount of graft.