A carbon emissions trading system (ETS) is a system that allows covered enterprises the flexibility to select the most cost-effective means to achieve a jurisdictionally defined set of carbon- and environmental, economic, and/or social goals. A well-designed ETS typically includes a number of components including:
(a) A systemwide science-based emissions limit (or cap);
(b) Enforceable enterprise-specific emission limits; and
(c) Market element whereby enterprises have the opportunity to meet limits through on-site measures as well as by providing finance to other enterprises to make necessary reductions.
As compared to other carbon reduction strategies (including the command and control and carbon taxes) a well-designed and effectively administered ETS can result in the achievement of goals on an accelerated schedule, at a lower cost, with greater co-benefits, and with improved certainty.
In an ETS, a regulator defines an upper limit (cap) of greenhouse gas (GHG) emissions that may be emitted in clearly defined sectors of an economy (scope and coverage). Emission allowances or permits are given out or sold (allocated) to the entities that are included in the ETS. By the end of a defined time period, each covered entity must surrender a number of allowances corresponding to their emissions during that period. Installations that have emitted less than the number of allowances they hold can sell any excess to other participants in the scheme. Entities with low abatement costs thus have an incentive to reduce their emissions, while those facing higher costs can choose to comply by purchasing allowances from the market.
Emissions trading provides greater environmental certainty in controlling overall emissions compared to an emissions tax, which defines a fixed emission price without restricting the quantity of GHGs emitted over a certain period. In both cases, rules for compliance and enforcement (MRV & enforcement) ensure that polluters pay for the environmental costs of their actions. Allowing installations to determine when and where to reduce emissions makes ETS a flexible and cost-efficient policy instrument. The institutional and legal framework in place should enable price discovery by fundamental market forces free of fraud and manipulation (market oversight).
Since the introduction of the first ETS for GHGs in the European Union in 2005, many other systems have emerged in North America, Asia, and the Pacific region at the regional, national, and local levels. Several other jurisdictions are currently considering implementing their own domestic ETS, including Vietnam, while some established ETSs have taken steps to reform and, in some cases, link their systems.
More detailed information about the ETS can be found in ‘Emissions Trading in Practice: A Handbook on Design and Implementation’ by the PMR & ICAP.
Source: https://icapcarbonaction.com/en/about-emissions-trading-systems
