Cap And Trade

Definition

Emission trading refers to a common government regulatory program aimed at limiting or capping the total emission levels of specific chemicals, particularly carbon dioxide, to reduce emissions from industrial activities. Proponents of quantified carbon emission trading see it as an acceptable alternative to a carbon tax. Both measures are efforts to reduce environmental damage without imposing excessive economic hardship on industries.

Origin

The concept of emission trading originated in the early 1990s, initially used in the United States to reduce sulfur dioxide emissions. In 1997, the Kyoto Protocol introduced it to the international stage, making it a crucial tool in global climate change mitigation efforts.

Categories and Features

Emission trading is mainly divided into two categories: mandatory markets and voluntary markets. Mandatory markets are where the government sets emission caps and allocates allowances, which companies must comply with. Voluntary markets allow companies to participate voluntarily to achieve higher environmental standards. Its features include flexibility, market-driven mechanisms, and cost-effectiveness.

Case Studies

A typical case is the European Union Emission Trading System (EU ETS), which has become one of the largest carbon markets globally since its launch in 2005. By setting emission caps and allowing companies to trade allowances, the EU ETS has successfully reduced greenhouse gas emissions across various industries. Another example is China's national carbon market, launched in 2021, covering the power sector and aiming to drive low-carbon transformation through market mechanisms.

Common Issues

Investors may encounter issues such as market volatility and policy uncertainty when applying emission trading. Additionally, many misunderstand its difference from a carbon tax; in reality, emission trading regulates through market mechanisms, whereas a carbon tax is a direct levy.