An emission trading system (ETS) is a powerful policy instrument for managing greenhouse gas (GHG) emissions. Cap and trade encourages operational excellence and provides an incentive and path for the deployment of new and existing technologies.
As a policy instrument, emissions trading is preferable to taxes, inflexible command-and-control regulation, and taxpayer-funded support programmes because:
Trading is not the only policy instrument that governments should use – but failing to give a major role to trading will impose unnecessary costs and create policy confusion.
Trading responds to the central objective of climate change policy of efficiently directing capital within markets towards low-to-zero carbon emissions investments. To achieve this aim, an emissions market requires:
The emissions markets should mature and grow, to evolve and provide wide GHG coverage:
This will lead to a global price for carbon and a trading system as exists in currency, commodity and debt markets. Ensuring that carbon has the proper links in all of these markets will require:
Carbon pricing opens the door to a new set of investment and financing opportunities. These opportunities can link the metrics and methods for GHG abatement with larger capital markets flows aimed at financing low-to-zero carbon investments all over the world.