Emission trading is a market that aims to lower greenhouse gas emissions. It grew more popular with the Kyoto protocol, the first international agreement to fight climate change. Emission trading got created to support the economy in the transition to a sustainable society.
Mainly, the market is for trading CO2, but it is also common to trade other polluting emissions. For example, all nations that signed the Kyoto protocol got a specific amount of “allowed emissions”. These allowed emissions are like a commodity that can get traded. As all countries have their share of emission rights, they can buy and sell them to each other, creating a carbon market.
Emissions trading today
As mentioned, trading with CO2 emissions became a global phenomenon with the Kyoto protocol. It was signed in 1997 and aimed to limit the emissions of 38 industrialised countries. Before that, similar systems had been introduced in the US to reduce air emissions. Today, carbon gets traded like any other commodity in the so-called carbon markets. Other greenhouse gas emissions, such as nitrous oxide, are also on the market.
There are massive emission trading systems (ETS) all over the world. The largest market is China. However, the nation is also the largest polluter of GHG emissions. More so, the EU has an enormous carbon market. Up until recently, it was the largest one in the world.
Emissions market in the EU
The market in the EU is called EU ETS. It is a very central and essential tool for reducing emissions. The union started trading with carbon in 2005. Which makes it the world’s first major carbon market. The European Union also deals with other polluting gases. Currently, it affects about 40 % of all greenhouse gas emissions in the region. The EU ETS also gets used as a leading example for other systems.
The EU ETS works with the “cap and trade” principle. A cap, meaning a limit of greenhouse gases, is set. This cap gets reduced over time, so emissions get forced down. Within this cap, there are emission allowances. These are known as European Union Allowances – EUAs. For example, each EUA gives the right to emit 1 ton of CO2. They get distributed among different sectors, such as the aviation industry and energy production. Other areas are the iron and steel industry. Then, these industries are free to trade the EUAs with one another. If a company emits over their allowances, they get fined.
Furthermore, buying an allowance and then cancelling it is possible. This action reduces the number of permits on the market, which increases the price of the remaining ones. A higher cost of the EUAs can lead to companies buying less. Instead, it might be cheaper to lower their emissions. Furthermore, the EU trades allowances outside the union, for example, with Iceland and Norway.
Criticism of the EU’s system
The EU trading system has gotten heavily criticised. Mainly because the EUAs sold at a low price. It used to be around 7 euros per EUA. Like any market, the prices change daily depending on supply and demand. The prices rose in 2017, positively affecting Europe’s total emissions. In 2021, they were 39.9 euros/ton of emissions.