Emission Trading: Harnessing Market Forces to Combat Climate Change

Emission Trading

Emission trading, also known as cap-and-trade, is a market-based approach to controlling pollution and greenhouse gas emissions. It is a policy tool used by governments to address environmental issues, particularly climate change. The goal of emission trading is to limit the total amount of emissions produced by various industries while allowing them to buy and sell emission allowances within a specified limit.

How it works?

Setting a Cap:

The government sets a cap on the total amount of emissions allowed in a specific period, often referred to as the emission reduction target. This cap is usually based on scientific analysis and environmental goals.

Allocation of Allowances

Emission allowances are permits issued by the government, where each allowance represents the right to emit a certain amount of greenhouse gases or other pollutants. These allowances are allocated to different entities, such as companies or industries that are responsible for emitting pollutants.


Once the allowances are allocated, companies that emit fewer pollutants than their allotted allowances can sell their surplus allowances to other companies that exceed their emissions limits. This creates a market for emission allowances, where the price of allowances is determined by supply and demand.


Companies are required to surrender enough allowances to cover their actual emissions. If a company emits more pollutants than its allocated allowances, it must buy additional allowances from the market or face penalties for non-compliance.

By creating a market for emission allowances, emission trading encourages companies to find cost-effective ways to reduce their emissions. Those that can reduce their emissions more efficiently can sell their surplus allowances to others, while companies facing higher emission reduction costs have the option to purchase allowances to meet their obligations.

The emission trading market can operate at various levels: local, regional, national, or even international. It has been implemented in different parts of the world to address various environmental challenges, such as the European Union Emissions Trading System (EU ETS), which is the largest and most well-known international emission trading system.

Overall, emission trading provides economic incentives for industries to reduce their greenhouse gas emissions and contributes to the global effort to combat climate change in a market-driven and cost-effective manner.

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