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Emissions Trading System Essay

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Updated: Apr 6th, 2022


Emission trading scheme involves pollution regulatory mechanism with which pollution emitting companies or factories should comply with usually given by the central government. According to Stavin, “Emission trading scheme is a market based approach used to control pollution by providing economic incentives for achieving reductions in the emission of pollutants” (2001, p.87).

This scheme targets the major market stakeholders in manufacturing and production, which emit the largest amounts of pollutants in the environment. The economic incentives provided by the central government to the complying industries in production and manufacturing include tax wavering on the raw materials hence low production costs.

In addition, the central government as the regulatory body sets limits of the amount of pollutant emissions allowed per industry, factory, or firm and sells them to the companies as pollution permits. These permits represent the right to emit a specified volume of the specified pollutant (Kanter 2007, p.68).

The pollution regulating body requires that firms should have several pollution permits equivalent to their emission quantities. The total number of pollution permits allocated to each firm from the central pollution regulation body remains fixed and the firms should not exceed the pollution emission limits provided for in the permits.

The emission-trading scheme led to the formation of multi- national organizations across the world, which includes the European Union emission-trading scheme with pollution regulation as the main purpose and major mandate. Significant reduction in the volume of pollutant emission would reduce emission of green house gases hence mitigate adverse climate changes caused by globalisation.

The purpose of emission trading scheme

Increase in emission of pollutants in the air and environment such as carbon dioxide, sulphur dioxide, and greenhouse gases, which cause adverse climatic changes such as global warming, high sea levels, and acid rains and therefore the major focus behind the formulation of the emission trading policy, was to reduce the level of the pollutant emissions to the environment.

Voss observes that, “The stratospheric ozone layer depletion due to air pollution has long been recognised as a threat to human health as well as to the Earth’s ecosystems” (2006, p.329). In the pursuit of the prevention of further depletion of the ozone, the emission-trading scheme aims at reducing by significant margins, the emission levels by regulating the amount of pollutants emitted by individual firms.

Moreover, emission-trading scheme is an enforcing strategy, which the pollution regulatory agency uses to enforce minimal pollutant emission targets. Burton and Sanjour argue that, the emission permits are enforceable limits on emission usually allowed over time intended towards a national pollution reduction target (1969, p.456).

This denotes that the emitting companies or firms regulate their emission volumes to fit within the allowed limits over the specified period while still maintaining production. The accumulation of the total reduction levels from each emitting firm gives the total national emission reduction levels.

For effective enforcement of the pollutant reduction policy, each time a firm renews its emission permits, some of the traded permits or credits are withdrawn leading to a net reduction each time a trade occurs (Coase 1960, p.43).

The withdrawing of permits from the emitting firms reduces their amount of emissions authorised, and therefore significantly reduces emission, which is the main target and purpose behind the formation of the emission-trading scheme. The main goal of the emission trading remains to downplay the cost of achieving set emission targets.

How emission-trading scheme works.

The emission-trading scheme involves the enactment of laws by the central government through the forces of political community. These emission regulation laws are in the form of caps in the constitution and therefore, the caps become a government control mechanism, which all individual companies or pollutant emitting agencies should comply.

Failure to comply with the set regulation is punishable by law or other government control mechanisms (Crocker 1966, p.223). This regulatory mechanism by the central regulating body helps in the implementation of the caps as stipulated in the constitution hence reducing the emissions to lower levels.

For effective regulations, individual companies and firms buy the caps from the emission regulatory body as emission permits. The emission permits bear a limit to which the firms should not exceed in volume of pollutants emitted.

The government as the regulating body allocates the limits to individual companies and firms and they represent the right to emit or discharge a specified type of pollutant (Dale 1969, p.790). The diversity of emissions from a single firm calls for firms to have more than one emission permit depending on the number of emissions a firm has.

The number of permits issued or sold to a firm should not exceed the set regulatory, hence; the emission levels are always below the set limits. Firms, which would require emitting more pollutants than allocated, would buy emission permits from companies emitting less than allocated hence trading of the emission permits (Weitzman 1984, p.477).

This exchange of emission permits between emitting firms ensures that the high emitting firms pay higher emission charges through buying more permits while on the other hand, the less emitting firms get incentives for their reduced emissions by selling their emission permits to others.

To the observation of Jacoby and Ellerman, “In effect, the buyer is paying for polluting, while the seller is being rewarded for having reduced emission” (2003, p.482). This allows the companies or firms to choose whether to increase their emissions thus increase their cost of production or reduce emission to lower cost of production.

As mentioned previously, companies and firms must comply with the regulation and therefore should not exceed the reduction target levels of emissions without the permits. This mechanism helps to regulate the emission levels of pollutants into the environment by the companies individually and a net reduction in emissions nationally.

Type of policy

The emission-trading scheme is a regulatory policy set up by the government as the central regulation body with an aim of regulating the quantities of emissions released to the environment and on the larger context to reduce the occurrence of adverse climatic changes, which affect both human and wildlife.

Wagner says, “…It is one of the ways countries can meet their obligations under the Kyoto protocol to reduce carbon emissions and thereby mitigate global warming” (2004, p.435).This policy is a work plan, which government uses to cut down to low levels the amount of pollutants emitted to the environment.

Advantages of the emission-trading scheme

The proponents of the emission trading scheme argues that, the scheme is more effective over other pollution regulatory mechanisms in that it targets specific and individual emitting companies, factories, or firms.

The limits imposed on these firms help the firms to adjust significantly their levels of emission hence reducing the national emission levels (Hepburn 2006, p.227). Individual firms choose between reduced productions costs by way of reducing emission or increased production cost by way of heavy government fines on the event of increased emission levels.

In addition, the emission trading mechanism acts on both the ‘heavy polluters’ and the ‘less polluters’, in which the heavy polluters buy permits from the less polluters and in so doing heavy polluters pay for their pollution while the less polluters get incentives for their less pollution ( Gilbertson, & Reyes 2009, p.345).

The incentive received by the low polluters reduces their production cost hence allows competition with other companies in market while on the other hand; heavy polluters’ high production cost reduces their competitive power in the market for their goods.

The emission-trading scheme on the other hand is sensitive to inflation; it adjusts its self according to the exchange rates in the money market and therefore does not require legislative actions.

The quick adjustment to new prices helps the regulatory body to avoid inflation and long time wasted in legislative formulation (Ott 1998, p.46). This policy is an advantage over the other pollution regulatory mechanisms such as the carbon markets requiring legislative actions in times of inflation.

Over carbon tax mechanism, emission trading scheme bears limits to which a company can emit and these limits are proportional to the permits bought; therefore, the company knows what it pays for as tax and can plan ahead while on the carbon tax , the is no limits.

The companies do not know the amount of tax for carbon emission would be and so cannot plan a head (Nordhaus 2007, p. 204). This gives an advantage to the emission-trading scheme because their emission costs remain predetermined.

Disadvantages and issues facing emission-trading scheme

The critics of the emission-trading scheme hold that, there is need to avoid emission-trading scheme in climatic change regulatory mechanisms because climatic changes require radical changes other than moderate changes of emission trading. According to Leonard, “Global warming requires nothing less than a reorganisation of society and technology that will leave most remaining fossil fuel safely underground” (2009, p.56).

Global warming needs firm regulatory mechanisms because it threatens all forms of life, not soft schemes.

In addition, the emission-trading scheme encourages continuation of business by the heavy polluters who are able to meet the high cost of pollution taxes levied on the firms. Kill observers that, “Emission schemes encourage business as usual as long term structural Met by many firms” (1998, p.35).

This allows the heavy polluters to continue polluting the environment simply because they can easily meet the pollution charges.

Here, the society suffers environmental pollution at the benefit of the emitting firm. Fisher confirms that, “…Carbon credits are frequently available from the less developed countries generated by local polluters at the expense of local communities” (1996, p.67).

In this case, due to the easy supply of the carbon credits or permits from the local less polluters, the heavy polluters can continue with business emitting pollutants to the environment.

High supply of the permits reduces the prices of the permits and therefore, reduces the incentives that the less polluting firms get from the sale of the permits to heavy polluters. On the other hand, low prices of the permits make it cheaper for the heavy polluters to continue emitting because the permits are cheaply obtainable (Macey 2009, p.456).

The regulatory body that issues the permits can risk over supplying the permits, which would have adverse effects to the environment, as pollution would continue eventually affecting the climatic changes.

Another issue facing the emission-trading scheme is the incentives given to firms in form of free permits. According to Sean, “…Polluting firms are given pollution permits for free” (2001, p.87) and this propagates continuous pollution and may even cause others not to cut down their emission levels.

Smith proposes, “Auctioning can alleviate the perverse incentive other than giving them freely” (2009, p.89). Through auction, each permit will bear a monetary value and therefore any emission that bears some cost will translate to the production cost.

Why I believe emission-trading scheme is sufficient

With many other failing pollution regulatory schemes, the emission-trading scheme in my own opinion is sufficient to mitigate climatic change simply because emission-trading scheme targets specific emitting firms and the regulatory body is central.

I think if other government regulatory mechanisms would regulate the supply of the permits to avoid over supply, then emission-trading scheme would sufficiently mitigate climate changes.

Through government forces, the emission-trading scheme can get the required enforcement because as a law, all companies must comply. Those companies heavily dependent on fossil fuels can find alternatives in technological advancement.


Although many pollution regulatory mechanisms are in place to mitigate climatic changes, emission-trading scheme seems more effective in checking climatic changes. Its target to specific firms helps to trim down the emission levels of individual firms and hence reduces emissions nationally and internationally.

Many emissions from companies, factories or firms contain carbon dioxide, sulphur dioxide, and green house gases which calls for regulation because given their contribution in depletion of the ozone layer posing a threat to life on earth. Emission trading scheme therefore, becomes the sufficient tool in climate change mitigation.

Reference List

Burton, E., & Sanjour, W., 1969. A cost effective study of air pollution abatement in The national area. Washington Dc: Ernst press.

Coase, R., 1960. The problem of social cost. Journal of the law and economics, 3 (1), pp. 40-44.

Crocker, T., 1966. The structuring of the atmospheric pollution control systems. New York: Norton and company.

Dale, J., 1969. Land, water and ownership. The Canadian journal of economics, 1(4), pp. 790-792

Fisher, B., 1996. Economics assessment of policy instrument for combating climatic Changes. UK: Cambridge university press.

Gilbertson, T., & Reyes, O., 2009. Carbon trading. New York: Harmmerskjold Foundation.

Hepburn, C., 2006.Regulating by prices, quantities or both. Review of economic Policy, 22 (2), pp. 226-227.

Jacoby, D., & Ellerman, E., 2004. The safety valve and climatic policy, Energy policy, 32(4) pp. 481-482.

Kanter, J., 2007. Carbon trading, where greed is green. New York: Macmillan.

Kill, J., 1998. The economics of climatic change mitigation. New York: McGraw- hill.

Leonard, A., 2009. The story of cap and trade. New York: McGraw-Hill.

Macey, K., 2009. No sinks in the EU ETS. New York: Macmillan.

Nordhaus, W., 2007. To tax or not to tax, Alternative approaches to slowing global Warming. Review of economics and policy 19 (1), pp. 201-205.

Ott, H., 1998. Emission trading in the Kyoto protocol finished and unfinished business. Linkage journal, 4(3), pp. 45-49

Sean, C., 2001. Carbon suffers further setbacks. The wall street journal, 30(1), pp.40-45.

Smith, N., 2009. Balanced new law important in climate change. New Zealand: Bridgit Williams book press.

Stavin, R., 2001. Experience with market based environmental policy instruments. Washington Dc: Ernst press.

Voss, R., 1960. Innovative processes in governance. The development of emission Trading, 3(1), pp. 33-35.

Wagner, M., 2004. Framework conventions on climate changes. New York: Macmillan.

Weitzman, M., 1984. Prices vs. Quantities. The review of economic studies, 4(4), pp.477-47.

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