Why Emissions Trading?

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:

• It is the most economically efficient means of reaching a given emissions reduction target;
  
• It is specifically designed to deliver the environmental objective; and,
  
• It delivers a clear price signal against which to measure abatement investments.

Trading is not the only policy instrument that governments can 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, an emissions market requires:

• Scarcity of emission allowances in order to create the price signals for low-carbon investments.
• Long-term clarity and predictability of rules, targets and the regulatory systems guiding emissions markets.
• Adequate compliance periods, allowing companies to structure a “make or buy” approach to their emissions reductions over time.
• Cost containment provisions, allowing efficiency in discovering of lowest-cost solutions wherever they are to be found. Offset-based mechanisms offer the opportunity for countries or sectors that have yet to introduce an allowance-based approach to participate in the market, while keeping down costs for compliance.