Carbon emission trading (also calledcarbon market,emission trading scheme (ETS) orcap and trade) is a type ofemissions trading scheme designed forcarbon dioxide (CO2) and othergreenhouse gases (GHGs). A form ofcarbon pricing, its purpose is tolimit climate change by creating a market with limited allowances for emissions. Carbon emissions trading is a common method that countries use to attempt to meet theirpledges under theParis Agreement, with schemes operational inChina, theEuropean Union, and other countries.[1]
Emissions trading sets a quantitative total limit on the emissions produced by all participating emitters, which correspondingly determines the prices of emissions. Under emission trading, a polluter having more emissions than their quota has to purchase the right to emit more from emitters with fewer emissions. This can reduce the competitiveness offossil fuels, which are the main driver ofclimate change. Instead, carbon emissions trading may accelerate investments intorenewable energy, such aswind power andsolar power.[2]: 12
However, such schemes are usually not harmonized with definedcarbon budgets that are required to maintainglobal warming below the critical thresholds of 1.5 °C or "well below" 2 °C, withoversupply leading to low prices of allowances with almost no effect on fossil fuel combustion.[3] Emission trade allowances currently cover a wide price range from €7 per tonne of CO2 inChina's national carbon trading scheme[4] to €63 per tonne of CO2 in theEU-ETS (as of September 2021).[5]
Other greenhouse gases can also be traded but are quoted as standard multiples of carbon dioxide with respect to theirglobal warming potential.
The economic problem withclimate change is that the emitters ofgreenhouse gases (GHGs) do not face theexternal costs of their actions, which include the present and future welfare of people, the natural environment,[6][7][8] and thesocial cost of carbon. This can be addressed with the dynamic price model of emissions trading.
An emissions trading scheme for greenhouse gas emissions (GHGs) works by establishingproperty rights for theatmosphere.[9] The atmosphere is a globalpublic good, and GHG emissions are an internationalexternality. In thecap-and-trade variant of emissions trading, a cap on access to a resource is defined and then allocated among users in the form of permits. Compliance is established by comparing actual emissions with permits surrendered.[10] The setting of the cap affects the environmental integrity of carbon trading, and can result in both positive and negative environmental effects.[11]
Emissions trading programmes such as theEuropean Union Emissions Trading System (EU-ETS) complement the country-to-country trading stipulated in theKyoto Protocol by allowing private trading of permits, coordinating with national emissions targets provided under the Kyoto Protocol. Under such programmes, a national or international authority allocates permits to individual companies based on established criteria, with a view to meeting targets at the lowest overall economic cost.[12]
"Economy-wide pricing of carbon is the centre piece of any policy designed to reduce emissions at the lowest possible costs".
Carbon emission trading began in Rio de Janeiro in 1992, when 160 countries agreed theUN Framework Convention on Climate Change (UNFCCC). The necessary detail was left to be settled by theUN Conference of Parties (COP).
In 1997, theKyoto Protocol was the first major agreement to reduce greenhouse gases. 38 developed countries committed themselves to targets and timetables.[14] The resulting inflexible limitations on GHG growth could entail substantial costs if countries have to solely rely on their own domestic measures.[15]
Carbon emissions trading increased rapidly in 2021 with the start of theChinese national carbon trading scheme.[16] The increasing costs of permits on theEU ETS have had the effect of increasing costs of coal power.[17]
A 2019 study by the American Council for an Energy Efficient Economy finds that efforts to put a price ongreenhouse gas emissions are growing in North America.[18] In 2021, shipowners said they were against being included in the EU ETS.[19]
Economists generally agree that to regulate emissions efficiently, all polluters need to face the fullmarginalsocial costs of their actions.[20] Regulation of emissions applied only to one economic sector or region drastically reduces the efficiency of efforts to reduce global emissions.[21] There is, however, no scientific consensus over how to share the costs and benefits of reducing future climate change, or the costs and benefits ofadapting to any future climate change.
Carbon offsetting is acarbon trading mechanism that enables entities to compensate for offsetgreenhouse gas emissions by investing in projects that reduce, avoid, or remove emissions elsewhere. When an entity invests in a carbon offsetting program, it receives carbon credit or offset credit, which account for the net climate benefits that one entity brings to another. After certification by a government or independent certification body, credits can be traded between entities. One carbon credit represents a reduction, avoidance or removal of one metric tonne ofcarbon dioxide or itscarbon dioxide-equivalent (CO2e).
A variety of greenhouse gas reduction projects can qualify for offsets and credits depending on the scheme. Some include forestry projects that avoid logging and plant saplings,[22][23]renewable energy projects such aswind farms,biomass energy,biogas digesters,hydroelectric dams, as well asenergy efficiency projects. Further projects includecarbon dioxide removal projects,carbon capture and storage projects, and the elimination ofmethane emissions in various settings such aslandfills. Many projects that give credits forcarbon sequestration have received criticism asgreenwashing because they overstated their ability to sequester carbon, with some projects being shown to actually increase overall emissions.[24][25][26][27]
Carbon offset and credit programs provide a mechanism for countries to meet theirNationally Determined Contributions (NDC) commitments to achieve the goals of theParis Agreement.[28]Article 6 of the Paris Agreement includes three mechanisms for "voluntary cooperation" between countries towards climate goals, includingcarbon markets. Article 6.2 enabled countries to directly trade carbon credits and units of renewable power with each other. Article 6.4 established a new international carbon market allowing countries or companies to use carbon credits generated in other countries to help meet their climate targets.
Carbon offset and credit programs are coming under increased scrutiny because their claimed emissions reductions may be inflated compared to the actual reductions achieved.[29][30][31]The Australia Institute highlights 23 instances where carbon offset schemes were found to have significant shortcomings.[32] These include claims of overestimatedcarbon sequestration, double-counting of credits, and the failure of projects to provide additional environmental benefits beyond what would have occurred naturally.
To be credible, the reduction in emissions must meet three criteria: they must last indefinitely, be additional to emission reductions that were going to happen anyway, and must be measured, monitored and verified by independent third parties to ensure that the amount of reduction promised has in fact been attained.[33]
[34]A domestic carbon emissions trading scheme is constrained in its regulatory jurisdiction. GHG emissions may thusleak to another region or sector with less regulation. Generally, leakages reduce the effectiveness of domestic emission abatement efforts. Notwithstanding, leakages may also be negative in nature, increasing the effectiveness of domestic abatement efforts.[35] For example, acarbon tax applied only to developed countries might lead to a positive leakage to developing countries.[36] However, a negative leakage might also occur due to technological developments driven by domestic regulation of GHGs,[37] helping to reduce emissions even in less regulated regions.
The current state of carbon emissions trading shows that roughly 22% of global greenhouse emissions are covered by 64 carbon taxes and emission trading systems as of 2021.[38] Energy intensive industries that are covered by such instruments may view the regulatory disparity between jurisdictions as a loss of competitiveness. They may therefore make strategic production decisions that involve carbon leakage. To mitigate carbon leakage and its effects on the environment, policymakers need to harmonize international climate policies and provide incentives to prevent companies from relocating production to regions with more lenient environmental regulations.[39]
Free emission permits, given to sectors vulnerable to international competition, are one way of addressing carbon leakage[40] by acting as asubsidy for the sector in question. TheGarnaut Climate Change Review considered the free allocation of permits unjustified in any circumstances, arguing that governments could deal withmarket failure or claims for compensation more transparently with the revenue from full auctioning of permits.[41]
Another economically efficient solution to carbon leakage is border adjustment,[42] where tariffs are set on imported goods from less regulated countries. A problem with border adjustments is that they might be used as a disguise for tradeprotectionism.[43] Some types of border adjustment may also not prevent emissions leakage.TheEU Carbon Border Adjustment Mechanism takes in effect for 6 sectors in 2026.[44]
Carbon trading can be helpful to achieveclimate justice. It can transfer money from rich countries, which tend to have higher emissions, to countries with lower incomes and lower emissions for improvedclimate action.[45]
The Paris Agreement provided a legal base for the creation of a global carbon market, which has a potentially significant role in stopping climate change.[46] In the beginning of 2024, the idea made some progress, as in theBonn meeting new tools and supervisory bodies was created.[47]
The rules of theEuropean Union Emissions Trading System include the possibility of connecting it with other trading systems. This has already happened with theSwitzerland emissions trading system.[46][48]China expressed a support for a global carbon market, saying it is better than theEU Carbon Border Adjustment Mechanism.[49]
In 2023 the global value of carbon markets was $948.75 billion.[50] It is expected to reach 2.68 trillion dollars by 2028[51] and 22 trillion by 2050.[52]
Merging the ETC of China and the EU can be something that sends "a powerful signal to the rest of the world and catalyzes international buy-in" while strongly increasing the efficiency of the system and allowing both countries to attain higher results with less spending.[53]
Tradable emissions permits can be issued to firms within an ETS by two main ways: by free allocation of permits to existing emitters or by auction.[54] In the first case, the government receives no carbon revenue. In the second it receives the full value of the permits, on average. In either case, permits will be equally scarce and just as valuable to market participants, such that the price at sale will be the same in either case.[citation needed]
Generally, emitters will profit from permits allocated to them for free. But if they must pay, their profits will be reduced. If the carbon price equals the true social cost of carbon, then long-run profit reduction will reflect the consequences of paying this new cost. If having to pay this cost is unexpected, then there will likely be a one-time loss due to the change in regulations and not simply due to paying the real cost of carbon. However, if there is advanced notice of this change, or if the carbon price is introduced gradually, this one-time regulatory cost will be minimized. There has now been enough advance notice of carbon pricing that this effect should be negligible on average.[citation needed]
Allocating permits based on past emissions is called "grandfathering".[55] Grandfathering permits can lead toperverse incentives, such as a firm being given fewer permits in the future for aiming to cut emissions drastically.[56] Another method of grandfathering is to base allocations on current production of economic goods rather than historical emissions. Under this method of allocation, the government will set a benchmark level of emissions for each good deemed to be sufficiently trade exposed and allocate firms units based on their production of this good. However, allocating permits in proportion to output implicitly subsidises production.[57]
The Garnaut Climate Change Review noted that grandfathered permits are not free of cost. As the permits are scarce, they have value, and the benefit of that value is acquired in full by the emitter. The cost is imposed elsewhere in the economy, typically on consumers who cannot pass on the costs:[41] The cost of a grandfathered permit may be regarded as theopportunity cost of not selling the permit at full value.[58] As a result, profit-maximising firms receiving free permits will raise prices to customers because of the new, non-zero cost of emissions.[59] This gives permit-liable polluters an incentive to reduce their emissions. However, if a firm sells the same amount of output as before that cap, with no change in production technology, the full value of permits received for free becomeswindfall profits.[58] However, since the cap reduces output and often causes the company to incur costs to increase efficiency, windfall profits will be less than the full value of its free permits.
Grandfathering may also slow down technological development towards less polluting technologies.[60] The Garnaut Report noted that any method for free permit allocation will have the disadvantages of high complexity, high transaction costs, value-based judgements, and the use of arbitrary emissions baselines.[41] Garnaut also noted that the complexity of free allocation and the large amounts of money involved encourage non-productiverent-seeking behaviour and lobbying of governments — activities that dissipate economic value.[41]
At the same time, allocating permits can be used as a measure to protect domestic firms who are internationally exposed to competition.[61] This happens when domestic firms compete against other firms that are not subject to the same regulation. This argument in favor of allocation of permits has been used in the EU ETS, where industries that have been judged to be internationally exposed have been given permits for free.[62]
TheInternational Air Transport Association, whose 230 member airlines comprise 93% of all international traffic, argue that emissions levels should be based on industry averages rather than using individual companies' previous emissions levels to set their future permit allowances, stating that "would penalise airlines that took early action to modernise their fleets, while a benchmarking approach, if designed properly, would reward more efficient operations".[63]
Hepburnet al. state that, empirically, businesses tend to oppose auctioning of emissions permits, while economists almost uniformly recommend auctioning permits.[64] Auctioning permits provides the government with revenues, which can be used to fund low-carbon investment and cuts indistortionarytaxes.[65][66] Auctioning permits can therefore be more efficient and equitable than allocating permits.[67] Garnaut stated that full auctioning will provide greater transparency and accountability and lower implementation and transaction costs as governments retain control over the permit revenue.[41] Auctions of units are more flexible in distributing costs, provide more incentives for innovation, lessen the political arguments over the allocation ofeconomic rents, and reduce tax distortions.[68] Recycling of revenue from permit auctions could also offset a significant proportion of the economy-wide social costs of a cap and trade scheme.[69]
Theperverse incentive of grandfathering can be alleviated through auctioning.[61]
Regulatory agencies run the risk of issuing too many emission credits, which can result in a very low price on emission permits.[70] This reduces the incentive that permit-liable firms have to cut back their emissions. On the other hand, issuing too few permits can result in an excessively high permit price.[61] An argument has been made for a hybrid instrument having a price floor and a price ceiling. However, a price-ceiling safety value removes the certainty of a particular quantity limit of emissions.[71]
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Emissions trading has been criticized for a variety of reasons. For one, it has been argued that climate change requires more radical solutions than pollution trading schemes, and that systemic changes must be made to reduce fossil fuel usage.[73][74] At the same time, carbon credits have been seen as enabling large companies to pollute the environment at the expense of local communities.[73] Carbon trading has also been criticised as a form ofcolonialism, in which rich countries maintain their levels of consumption while getting credit for carbon savings in inefficient industrial projects.[75]
Groups such asthe Corner House have argued that the market will choose the easiest means to save a given quantity of carbon in the short term, which may be different from the means to reduce climate change.[citation needed] In September 2010, campaigning groupFERN released "Trading Carbon: How it works and why it is controversial"[76][full citation needed] which compiles many of the arguments against carbon trading. According to Carbon Trade Watch, carbon trading has had a "disastrous track record". The effectiveness of the EU ETS was criticized, and it was argued that the CDM had routinely favoured "environmentally ineffective and socially unjust projects".[77]
Some groups have claimed that non-existent emission reductions can be recorded under the Kyoto Protocol due to the surplus of allowances that some countries possess. For example, Russia had a surplus of allowances due to its economic collapse following the end of the Soviet Union.[75] Other countries could have bought these allowances from Russia, but this would not have reduced emissions. In practice, as of 2010, Kyoto Parties had not yet chosen not to buy these surplus allowances.[78]
The complexity of cap and trade schemes around the world has resulted in the uncertainties around such schemes in Australia, Canada, China, the EU, India, Japan, New Zealand, and the US. As a result, some organizations have had little incentive to innovate and comply, resulting in an ongoing battle of stakeholder contestation for the past two decades.[79]
Proposals for alternative schemes to avoid the problems of cap-and-trade schemes includeCap and Share,[clarification needed] which was considered by the Irish Parliament in 2008, and theSky Trust schemes.[80]
Carbon emission trading without border adjustments for exports leads to reduced global competitiveness for carbon-intensive products.[81]
TheFinancial Times published an article about cap-and-trade systems, which argued that "Carbon markets create a muddle" and "...leave much room for unverifiable manipulation".[82] Emissions trading schemes have also been criticised for the potential of creating a newspeculative market through the commodification of environmental risks throughfinancial derivatives.[83][clarification needed]
Annie Leonard's 2009 documentaryThe Story of Cap and Trade criticized carbon emissions trading for the free permits to major polluters giving them unjust advantages, cheating in connection withcarbon offsets, and as a distraction from the search for other solutions.[84]
In China, some companies started artificial production of greenhouse gases with sole purpose of recycling and gaining carbon credits. Similar practices happened in India. Earned credit were then sold to companies in US and Europe.[85][86]
Corporate and governmental carbon emission trading schemes have been modified in ways that have been attributed to permittingmoney laundering to take place.[87][88]
In 2003 theNew South Wales (NSW)state government unilaterally established theNew South Wales Greenhouse Gas Abatement Scheme[89] to reduce emissions by requiring electricity generators and large consumers to purchase NSW Greenhouse Abatement Certificates (NGACs). This has prompted the rollout of free energy-efficient compact fluorescent lightbulbs and other energy-efficiency measures, funded by the credits. This scheme has been criticised by the Centre for Energy and Environmental Markets (CEEM) of theUniversity of New South Wales (UNSW) because of its lack of effectiveness in reducing emissions, its lack of transparency and its lack of verification of the additionality of emission reductions.[90]
Prior to the2007 federal election, both the incumbentHowardCoalition government and theRuddLabor opposition promised to implement an emissions trading scheme (ETS). Labor won the election, and the new government proceeded to implement an ETS. The new Rudd government introduced theCarbon Pollution Reduction Scheme, which theLiberal Party of Australia (now led byMalcolm Turnbull) supported.Tony Abbott questioned an ETS, advocating a "simple tax" as the best way to reduce emissions.[91] Shortly before the carbon vote, Abbott defeated Turnbull in a leadership challenge (1 December 2009), and from there on the Liberals opposed the ETS. This left the Rudd Labor government unable to secure passage of the bill, and it was subsequently withdrawn.
Julia Gillard defeated Rudd in a leadership challenge, becoming Federal Prime Minister in June 2010. She promised that she would not introduce a carbon tax, but would look to legislate a price on carbon[92] when taking the government to the2010 election. In the first Australianhung-parliament result in 70 years, the Gillard Labor government required the support of crossbenchers - including theGreens. One requirement for Greens' support was a carbon price, which Gillard proceeded with in forming a minority government. A fixed carbon-price would proceed to a floating-price ETS within a few years under the plan. The fixed price lent itself to characterisation as a "carbon tax", and when the government proposed theClean Energy Bill in February 2011,[93] the opposition denounced it as a broken election promise.[94]
TheLower House passed the bill in October 2011[95] and theUpper House in November 2011.[96] The Liberal Party vowed to repeal the bill if elected.[97] The bill thus resulted in passage of the Clean Energy Act, which possessed a great deal of flexibility in its design and uncertainty over its future.
TheLiberal/National coalition government elected in September 2013 promised to reverse the climate legislation of the previous government.[98] In July 2014, the carbon tax was repealed - as well as the Emissions Trading Scheme (ETS) that was to start in 2015.[99]
The Canadian provinces ofQuebec andNova Scotia operate an emissions trading scheme. Quebec links its program with the US state ofCalifornia through theWestern Climate Initiative.
TheChinese national carbon trading scheme is the largest in the world. It is an intensity-based trading system forcarbon dioxide emissions by China, which started operating in 2021.[100] The initial design of the system targets a scope of 3.5 billion tons of carbon dioxide emissions that come from 1700 installations.[101] It has made a voluntary pledge under the UNFCCC to lower CO2 per unit of GDP by 40–45% in 2020 when comparing to the 2005 levels.[102]
In November 2011, China approved pilot tests of carbon trading in seven provinces and cities—Beijing, Chongqing, Shanghai, Shenzhen, Tianjin, as well as Guangdong Province and Hubei Province, with different prices in each region.[103] The pilot is intended to test the waters and provide valuable lessons for the design of a national system in the near future. Their successes or failures will, therefore, have far-reaching implications for carbon market development in China in terms of trust in a national carbon trading market. Some of the pilot regions can start trading as early as 2013/2014.[104] National trading is expected to start in 2017, latest in 2020.
The effort to start a national trading system has faced some problems that took longer than expected to solve, mainly in the complicated process of initial data collection to determine the base level of pollution emission.[105] According to the initial design, there will be eight sectors that are first included in the trading system: chemicals, petrochemicals, iron and steel, non-ferrous metals, building materials, paper, power and aviation, but many of the companies involved lacked consistent data.[101] Therefore, by the end of 2017, the allocation of emission quotas have started but it has been limited to only the power sector and will gradually expand, although the operation of the market is yet to begin.[106] In this system, Companies that are involved will be asked to meet target level of reduction and the level will contract gradually.[101]
TheEuropean Union Emissions Trading System (EU ETS) is a carbon emission trading scheme (orcap and trade scheme) that began in 2005 and is intended to lowergreenhouse gas emissions in the EU. Cap and trade schemes limit emissions of specified pollutants over an area and allow companies to trade emissions rights within that area. The ETS covers around 45% of the EU's greenhouse gas emissions.[107]
As from 2027 road transport and buildings and industrial installation that fell out of EU ETS will be covered by a new EU ETS2. The "old" ETS and the newEU ETS2 allowances will be traded independently. A major difference to the ETS is that ETS2 will cover the CO2 emissions upstream - whereby accredited fuel suppliers who places the fuel on the EU market will be obliged to cover that fuel with ETS2 emission allowances. The ETS2 covers around 40% of the EU's greenhouse gas emissions.
The scheme has been divided into four "trading periods". The first ETS trading period lasted three years, from January 2005 to December 2007. The second trading period ran from January 2008 until December 2012, coinciding with the first commitment period of theKyoto Protocol. The third trading period lasted from January 2013 to December 2020. Compared to 2005, when the EU ETS was first implemented, the proposed caps for 2020 represent a 21% reduction of greenhouse gases. This target was achieved six years early as emissions in the ETS fell to 1.812 billion (109) tonnes in 2014.[108]
The fourth phase started in January 2021 and will continue until December 2030. The emission reductions to be achieved over this period are unclear as of November 2021, as theEuropean Green Deal necessitates tightening of the current EU ETS reduction target for 2030 of -43% concerning to 2005. TheEU Commission proposes in its "Fit for 55" package to increase the EU ETS reduction target for 2030 to −61% compared to 2005.[109][110]
EU countries view theemissions trading scheme as necessary for meeting climate goals. A strong carbon market guides investors and industry in their transition fromfossil fuels.[111] A 2020 study found that the EU ETS successfully reduced CO2 emissions even though the prices for carbon were set at low prices.[112] A review of 13 policy evaluations quantifies this emission reduction effect at 7%.[113] A 2023 study on the effects of the EU ETS identified a reduction in carbon emissions in the order of -10% between 2005 and 2012 with no impacts on profits or employment for regulated firms.[114] The price of EU allowances exceeded 100€/tCO2 ($118) in February 2023.[111] A 2024 study further demonstrated that the EU ETS has incidentally contributed to reduce atmospheric levels of air pollutants in the EU including sulfur dioxide, fine particulate matter, and nitrogen oxide.[115] This reduction has translated in local health co-benefits, alongside the system's primary goal of mitigating climate change.Trading is set to begin in 2014 after a three-year rollout period. It is a mandatory energy efficiency trading scheme covering eight sectors responsible for 54 per cent of India's industrial energy consumption. India has pledged a 20 to 25 per cent reduction inemission intensity from 2005 levels by 2020. Under the scheme, annual efficiency targets will be allocated to firms. Tradable energy-saving permits will be issued depending on the amount of energy saved during a target year.[104][needs update]
Japan as a country does not have a compulsory emissions trading scheme. The government in 2010 (theHatoyama cabinet) had planned to introduce one, but the plan lost momentum after Hatoyama resigned as prime minister, due partly from industrial opposition,[116] and was eventually shelved. Japan has a voluntary scheme. Furthermore, theKyoto Prefecture has a voluntary emissions trading scheme.[117]
Two regional mandatory schemes exist however, in Tokyo and Saitama Prefecture. The city of Tokyo consumes as much energy as "entire countries in Northern Europe, and its production matches the GNP of the world's 16th largest country". A cap-and-trade carbon trading scheme launched in April 2010 covers the top 1,400 emitters in Tokyo, and is enforced and overseen by theTokyo Metropolitan Government.[118] Phase 1, which was similar to Japan's voluntary scheme, ran until 2015.[119] Emitters had to cut their emissions by 6% or 8% depending on the type of organization; from 2011, those who exceed their limits were required to buy matching allowances, or invest in renewable-energy certificates, or offset credits issued by smaller businesses or branch offices.[120] Polluters that failed to comply were liable up to 500,000 yen in fines plus credits for 1.3 times excess emissions.[121] In its fourth year, emissions were reduced by 23% compared to base-year emissions.[122] In phase 2 (FY2015–FY2019), the target was expected to increase to 15–17%. The aim was to cut Tokyo's carbon emissions by 25% from 2000 levels by 2020.[120]
One year after Tokyo launched its cap-and-trade scheme, the neighbouringSaitama Prefecture launched a highly similar scheme. The two schemes are connected.[117]
TheNew Zealand Emissions Trading Scheme (NZ ETS) is an all-gases partial-coverage uncapped domesticemissions trading scheme that features price floors, forestry offsetting, free allocation and auctioning of emissions units.
The NZ ETS was first legislated in theClimate Change Response (Emissions Trading) Amendment Act 2008 in September 2008 under theFifth Labour Government of New Zealand[123][124] and then amended in November 2009[125] and in November 2012[126] by theFifth National Government of New Zealand.
The NZ ETS was until 2015 highly linked to international carbon markets as it allowed unlimited importing of most of theKyoto Protocol emission units. There is a domestic emission unit; the 'New Zealand Unit' (NZU), which was initially issued by free allocation to emitters until auctions of units commenced in 2020.[127] The NZU is equivalent to 1 tonne of carbon dioxide. Free allocation of units varies between sectors. The commercial fishery sector (who are not participants) received a one-off free allocation of units on a historic basis.[128] Owners of pre-1990 forests received a fixed free allocation of units.[129] Free allocation to emissions-intensive industry,[130][131] is provided on an output-intensity basis. For this sector, there is no set limit on the number of units that may be allocated.[132][133] The number of units allocated to eligible emitters is based on the average emissions per unit of output within a defined 'activity'.[134] Bertram and Terry (2010, p 16) state that as the NZ ETS does not 'cap' emissions, the NZ ETS is not a cap and trade scheme as understood in the economics literature.[135]
Some stakeholders have criticised the New Zealand Emissions Trading Scheme for its generous free allocations of emission units and the lack of acarbon price signal (theParliamentary Commissioner for the Environment),[136] and for being ineffective in reducing emissions (Greenpeace Aotearoa New Zealand).[137]South Korea's national emissions trading scheme officially launched on January 1, 2015, covering 525 entities from 23 sectors. With a three-year cap of 1.8687 billion tCO2e, it now forms the second-largest carbon market in the world, following the EU ETS. This amounts to roughly two-thirds of the country's emissions. The Korean emissions trading scheme is part of the Republic of Korea's efforts to reduce greenhouse gas emissions by 30% compared to the business-as-usual scenario by 2020.[122]
TheAmerican Clean Energy and Security Act (H.R. 2454), a greenhouse gas cap-and-trade bill, was passed on 26 June 2009 in the House of Representatives by a vote of 219–212. The bill originated in the House Energy and Commerce Committee. It was introduced by Representatives Henry A. Waxman and Edward J. Markey.[141] The political advocacy organizationsFreedomWorks andAmericans for Prosperity, funded bybrothers David and Charles Koch ofKoch Industries, encouraged theTea Party movement to focus on defeating the legislation.[142][143] Although cap and trade also gained a significant foothold in the Senate via the efforts of RepublicanLindsey Graham, Independent and former DemocratJoe Lieberman, and DemocratJohn Kerry,[144] the legislation died in the Senate.[145]
President Barack Obama's proposed2010 United States federal budget wanted to support clean energy development with a 10-year investment of US$15 billion per year, generated from the sale of greenhouse gas emissions credits. Under the proposed cap-and-trade program, all GHG emissions credits would have been auctioned off, generating an estimated $78.7 billion in additional revenue in FY 2012, steadily increasing to $83 billion by FY 2019.[146] The proposal was never made law. Failing to get congressional approval for such a scheme, PresidentBarack Obama instead acted through theUnited States Environmental Protection Agency to attempt to adopt theClean Power Plan, which does not feature emissions trading. The plan was subsequently challenged by the administration of PresidentDonald Trump.
In 2021, Washington state institutedits own emissions trading system, which it called "cap-and-invest." Revenue from the auctioning of carbon allowances is directly invested in programs intended to address climate change.
In the United States, most polling shows large support for emissions trading.[147][148][149][150]
Setting the cap properly matters more to environmental protection than the decision to allow, or not allow, trades
Carbon offsets and credits :1 was invoked but never defined (see thehelp page).{{cite news}}: CS1 maint: url-status (link)However, there often are important trade-offs in terms of efficiency because OBA implicitly subsidizes production, unlike conventional lump-sum allocation mechanisms like grandfathering.
An auction is preferred to grandfathering (giving companies permits based on historical output or emissions), because it allows reduced tax distortions, provides more flexibility in distribution of costs, provides greater incentives for innovation, and reduces the need for politically contentious arguments over the allocation of rents.
{{cite news}}:|author= has generic name (help){{cite news}}:|author= has generic name (help)In the short term, the Government is unlikely to sell emission units because the Kyoto units allocated to New Zealand will be needed to support New Zealand's international obligations, as well as allocation to eligible sectors under the emissions trading scheme.
The Bill changes the allocation provisions of the existing CCRA from allocating a fixed pool of emissions to an uncapped approach to allocation. There is no longer an explicit limit on the number of New Zealand units (NZUs) that can be allocated to the industrial sector.
The New Zealand ETS does not fit this model because there is no cap and therefore no certainty as to the volume of emissions with which the national economy must operate
The allocation of free carbon credits to industrial processes is extremely generous and removes the carbon price signal where New Zealand needs one the most
We now have on the table a pathetic ETS which won't actually do anything to reduce emissions
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