What is an Emission Trading Program?
An emission trading program --or cap-and-trade program -- is a system devised to provide economic incentives for companies to reduce the amount of pollutants they release into the atmosphere.
But before an emission trading program can be implemented, a national or regional goal needs to be set that limits the total amount of emissions permitted to be released into the atmosphere from various sources. This environmental goal forms a fundamental part of any emissions trading program.
These environmental pollution limits are usually lower than they were prior to the introduction of the program, and may be implemented in stages, to ensure pollution levels are reduced over time. The primary goal of the program is to protect both environmental and public health, and to maintain the level of protection, regardless of whether the number of contributing sources grows or whether there is increased use of existing polluting sources. The pollution limits ensure that pollution outputs are both stable and predictable for both the public and affected sources, as well as for allowance trading markets.
Emission sources, for example power plants, that form part of an emissions trading program are issued an allowance that essentially allows them to emit a stipulated quantity of pollutant/s into the atmosphere.
Upon being allocated an allowance, an emission source can use it in order to meet current environmental compliance goals, or they save (bank) it to use to meet compliance goals in the future. They can also trade their allowance (or any unused portion of their allowance) on an allowance market, selling it to other emission sources who need to increase their amount of pollutants they are allowed to emit in order to meet environmental compliance goals.
An emission trading program therefore provides emission sources such as power plants with greater flexibility to help them comply with the pollution limitations that have been set in order to achieve the overall environmental goal. A power plant, for example, can install technology that controls and removes pollutants before they are emitted into the atmosphere, they can fine-tune existing pollution control measures so that they are more effective, or they can upgrade existing pollution control measures as more advanced pollution control/reduction methods become available. They can also opt for alternative, cleaner fuels that produce less emissions or make changes to production units to ensure production is more efficient and produces less emissions. Emission sources are also permitted to purchase unused allowances from other sources that are being traded on the market. Being able to sell a surplus allowance to other emission sources, or bank them for future use, serves as an incentive for emission sources to make a concerted effort to reduce their emissions beyond that required in order to meet their environmental compliance objectives.
In order for an emission trading program to be successful, there needs to be sufficient checks and balances to ensure accountability. Consequently emission sources need to accurately monitor the pollutants they emit into the atmosphere, and provide reports that include the data collected during these observations. To ensure complete accountability and transparency, and to encourage compliance with the environmental goals as determined by the emission trading program, the data collected is freely available for members of the public to review. In order to meet the compliance goals of the emission trading program, the emissions produced by an emission source for the compliance period must be less than or equal to half the allowance they hold, whether allocated or purchased on the emissions trade market. Should an emission source emit more pollutants than they hold allowances for, they are automatically subjected to a penalty, which can be in the form of a fine, or mean surrendering a portion of their future allowance, or both.
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