What is the Emissions Market?

Mary McMahon

The emissions market is a part of the open marketplace which trades credits or vouchers for emissions of pollutants, typically pollutants like greenhouse gases. Many nations around the world have instituted emissions trading as a method for reducing overall pollution and addressing issues like global warming. Several nations hope to establish a global emissions market, recognizing the fact that pollutants impact the world on a global scale, not just individual nations.

Emission credits are used as an incentive to reduce carbon emissions.
Emission credits are used as an incentive to reduce carbon emissions.

There are several ways to organize an emissions market. Generally, most people prefer what is called a cap and trade system. In a cap and trade market, a government determines an overall “cap” of allowable emissions of various pollutants, and then essentially issues companies with credits; the amount of credit is based on a company's size, the industry it works in, and similar factors. If a company emits less pollutants than permitted under its cap, it can sell or trade credits with companies which are afraid of exceeding their caps.

Under a cap and trade system, companies which pollute are penalized, while companies which undertake measures to be more environmentally friendly are rewarded. Many economists support this system, since it rewards good actions while penalizing bad ones in a vary clear and obvious way. In this sense, an emissions market encourages all companies to be more environmentally friendly, since if a company can achieve an emissions target below its base, it may be able to profit on its unused credits.

In another system known as a baseline and credit system, companies are assigned pollution baselines, rather than caps. If a company exceeds the baseline, it is penalized, while companies which go under their baselines receive credits. This system tends to be criticized, since unlike a cap and credit system, it does not control overall emissions by establishing a nation-wide cap; companies can essentially buy the right to pollute excessively.

The establishment of an emissions market is a powerful economic incentive. As global awareness about pollution rose in the early 21st century, concepts like emissions markets started to gain popularity, because people realized that they needed to act quickly to put a stop to pollution. By addressing the issue with measures designed to reduce overall pollution, especially emission of greenhouse gases, governments hope to preserve the world for future generations to enjoy.

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