Emissions Trading

27th July, 2005

Emissions trading is a form of economic instrument whereby ‘permits to pollute’ are traded on a market. There is worldwide interest in using emissions trading to control levels of greenhouse gases, which are causing climate change. It is proposed that international aviation is brought into the EU emissions trading system.

The authority (typically government) decides how much of the pollutant is allowed to be emitted in a given region in a given time. But instead of allocating fixed limits to each polluter, a market is set within which permits can be traded. The number of permits is set such that if all are taken up, the total emissions will be equal to the limit or ‘cap’.The great advantage of emissions trading is the flexibility it offers to those polluters who find it hard (expensive) to reduce their emissions as well as those who find it easy.

Those who find it easy to reduce emissions have a financial incentive to do so as they then need to buy less permits. Those who find it hard to reduce emissions can buy the spare permits. The total emissions are controlled by the total permits on the market such that emissions trading is, in theory, the most economically efficient method of achieving a given target.

There is increasing interest in the use of trading schemes for climate mitigation. The Kyoto protocol established targets for greenhouse gas emissions cuts accompanied by a form of emissions trading, though international aviation was omitted from the Kyoto agreement. An EU emissions trading scheme for certain economic sectors is being introduced and it has been proposed that this should be extended to include aviation.

Although emissions trading has theoretical advantages over other forms of economic instruments such as charges and taxes, there are significant practical problems, and doubts as to whether the schemes are really effective in addressing climate change. An excellent critique of emissions trading for aviation, and of the industry’s support for it, appeared in the Observer newspaper on 18 July 2005. This was written by Lord Berkeley, president of the AEF, and was based on information supplied by the AEF. Emissions Trading Observer Article

An AEF briefing on emissions trading is available here.