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Emission Trading

September 7, 2022

Written by Julia Myers

Emissions trading is a system in which a regional or national government gives or auctions allowances to corporations on how many tons of emission they can produce, and corporations must pay a fee for every ton of emission they produce beyond the allowance. Enforcement involves continuously monitoring emissions from each site. Surplus allowances can be sold to other companies on the open market, generally in units of one ton. Because going over the allowance results in a fee, and not using all of one's allowance allows companies to sell the surplus allowances to other companies, this system makes reducing emissions the most profitable option for companies.

How has it been used in the past?

In 1995, the EPA used this method to reduce Sulfur Dioxide and Nitrogen Oxides as they were causing acid rain. This was part of title IV of the clean air act, which intended to reduce Sulfur Dioxide levels by 10 million tons below 1980 levels through a 2 phase program. Phase one began in 1995 and set limits on 445 sites, mostly coal burning power plants. Phase two started in 2000 and included over 2000 units as it encompassed smaller power plants as well as large ones. This system was highly effective. Sulfur Dioxide levels dropped by 50 percent and Nitrate levels dropped by 30 percent. These regulations are the reason acid rain is less of an issue than it used to be.

How is it being used currently?

The European Union established an emissions trading system (ETS) that includes limits on carbon dioxide. It places allowances on 10000 sites in every country of the EU as well as Norway, Iceland, and Liechtenstein. The sites are mostly power plants, manufacturing sites, and airlines. They account for 40 percent of EU emissions. This emissions trading system has established a market of corporations buying and selling emissions allowances. The cost of allowances vary, but as of recently, they are over 80 euros per ton while the fee of going over is 100 euros per ton. The cost varies system to system. As of 2021, China also has a fully operational emissions trading system. The cost of trading allowances on the free market, however, is much lower than in Europe so motivation to stay under the allowance may be lower. The ETS in China is set to be the largest in the world.

How is it being used in America?

America does not have a nationwide emissions trading system established. A number of states have collaborated to establish emission trading systems though. Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, and Virginia have all joined the Regional Greenhouse Gas Initiative. California has its own emission trading system. In 2009 a bill was introduced to establish a nationwide emissions trading system. It passed the house but not the senate. Joe Biden promised to “establish an enforcement mechanism to curb climate change” during the election. In the primary, he expressed support for emission trading systems, but has since favored other methods.

What can we do?

Emissions trading is one policy of many that we can use at a government level to fight climate change. It is not everyone’s preferred method; the green new deal does not advocate emissions trading. Many politicians do support emissions trading though. Voting for candidates who support emission trading is the thing to do if you believe it is a good way to combat climate change.

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