Emissions trading

Emissions trading, shortly emissions trading or emissions allowance trading, is an instrument of environmental policy with the aim to reduce emissions at the lowest possible economic cost. In the European Union the EU emissions trading for carbon dioxide emission in 2005 was introduced by law, the idea of emissions trading has been developed in 1968 by John Harkness Dales.

• 3.1 Current trading systems for greenhouse gas
• 3.2 Current commercial systems for other allowances
• 3.3 Historical trading systems

• 7.1 Books
• 7.2 Articles

Theoretical foundations

The basic idea

The basic idea for the emissions trading was conceived in 1966 by Thomas Crocker, an economics graduate students at the University of Wisconsin - Milwaukee. He argued that self-organization would carry out trade to the best results for all stakeholders.

JH Dales suggested in his book Pollution, Property and Prices, set up a market for pollution rights to limit water pollution from industrial effluents.

But first a cap on certain issues ( eg, carbon dioxide, sulfur dioxide, nitrogen oxide ) within a specified area (regional, national, international) and a specific period must be politically determined (eg calendar year). Then, played according to the upper limit, so-called green certificates, which entitle the holder to emit a certain amount. To be determined, for example, for a particular region, an upper limit of 100 million tons of carbon dioxide within a year, so certificates are issued, entitling total emission of 100 million tons of carbon dioxide. This limit may be lowered gradually in the following years. Since these certificates are freely tradable, the price of these certificates is determined by demand. Emissions that occur without emission rights will be subject to a penalty. In the English language one speaks also of cap and trade.

The key advantage of this market-based solution is that not every player has to save the same amount of pollution. The decisive factor is the total of all actors. There is an incentive for those stakeholders who will be saving is particularly easy (which have the lowest reduction costs ) to reduce their emissions the most. In other words, it can take over with the lowest reduction costs reducing emissions of those firms for which the reduction would be very expensive by trading those players. In effect, this means that a desired amount of reduction can be achieved particularly cost (economic minimum principle ) and the emissions can be reduced as much as possible to desired cost ( maximum principle). Emissions trading is thus more efficient than the Pigouvian tax or environmental tax and significantly more efficient than regulatory or planning instruments of environmental policy from an economic perspective.

Through emissions trading, market prices for certain products may increase. This gives consumers the appropriate signals to the economical use of environmentally damaging products.

Classification of emissions trading in the environmental policy instruments

Emissions trading is considered one of the economic instruments of environmental policy.

Market-based instruments can be divided into price and volume solutions. The price solutions such as the Pigouvian tax or environmental tax are counted. They are long-term predictable for market participants in the ideal case. Basic problem with these instruments is that the steering effect is difficult to predict with regard to the environmental objective. A low tax environment missed the goal too high does not enforce the necessary changes.

Emissions trading is counted to the amount solutions, because the government specifies a specific amount for a specific issue here. This eliminates the problematic determination of the amount of the tax rate, and the legislature can influence the environmental objective directly. One speaks therefore of a high environmental effectiveness of emissions trading. However, the price trend and thus the burden on businesses and consumers are difficult to predict.

Issue of certificates

The issue of the certificates can be basically divided into two forms:

• Allocation by the government and
• Auction.

In the allotment by the government is politically determined who gets how many certificates. This output format is only useful if there are objective criteria for the allocation, as otherwise there is a danger that politically influential interest groups are favored. Thus, for example, in the context of an international emissions trading, in which it comes, with global impact (eg greenhouse gases) to disperse pollutants emitted on the participating States, the allowances are allocated according to population numbers. States with a high consumption of fossil fuels would have to buy more certificates in states with low energy consumption. Economically weak countries that have a relatively low energy consumption generally, that will lead to additional revenue. This output format is revenue neutral.

If there are no objective criteria for allocation by the government, it makes sense to auction allowances. Thus, for example, the right to fossil fuels within a state or a federation of states to bring to the market, are linked to the purchase of certificates corresponding to the carbon content of the energy source. From unwinding ago this is similar to the levying of a tax. Unlike a tax, however, the price is not determined by the policy, but is formed through the market mechanism.

Both for the " auction " as well as the business itself offers the market mechanism (eg through a stock exchange ). This is accompanied, of course, that speculative transactions are possible.

Emissions trading in greenhouse gases

Currently there are two trade systems for greenhouse gas emissions: the Kyoto Protocol agreed in bilateral trade between Annex- I countries as well as within Europe, the EU emissions trading for companies. The starting point is the realization that many pollutants are not only locally, but spacious, so that the reduction of emissions can be considered and evaluated through large geographical areas. The man-made emissions of greenhouse gases, ie gases that contribute to further global warming will be reduced worldwide. Thus, the threat of climate change is to be averted or slowed their progress.

Carbon dioxide ( CO2) is the greenhouse gas with the quantitatively largest emission. Some other gases are in spite of very low emission levels for the greenhouse effect is important. The design of this component takes place with the global warming potential (GWP ). This value specifies how large is the respective contribution of a gas to the greenhouse effect as CO2 equivalents. Most of the global warming potential is based on 1 kg gas and an observation period of 100 years. The global warming potential of example, 1 kg of methane corresponds to 25 kg of CO2. Nitrous oxide is 298 times and sulfur hexafluoride SF6 even 22,800 times more harmful to the climate than CO2.

Why was the Kyoto Protocol, which specifies the provisions of the UNFCCC United Nations, agreed, how many of these climate-changing gases can emit individual countries or groups of countries and what mitigation steps within a specified time schedule they undertake.

With the conventional instruments ( in Germany, the Federal Pollution Control Act ) would be such quantitative goals hardly or only with great difficulty to reach. Theoretically, the administrative authorities to grant each company at the request of a permit for the emission of certain quantities of greenhouse gases.

In addition to legal problems that would have such a procedure, appeals primarily to the idea, however, that the reduction of emissions of greenhouse gases depending on the industry or, depending on industrial technology causes very different costs. Who can at what cost how much emissions avoided, however, companies know yourself much better, because they know their own technology, its own processes and its further development.

Trading systems in practice

Current trading systems for greenhouse gas

• The Kyoto Protocol, an a decree on 11 December 1997 additional protocol to the Framework Convention on Climate Change (UNFCCC ) United Nations with the aim of climate protection, contains as an essential " flexible " one instrument emissions trading between countries.
• Within Europe, the European Union first tried with the EU emissions trading scheme since 2005 to reach the agreed in the Kyoto Protocol climate protection target. It is the world's first multi-national emissions trading system and acts as a pioneer of a possible global system. Meanwhile, it was decided what rules the emissions trading scheme from 2013 - to be continued - ie after the end of the first commitment period of the Kyoto Protocol.
• In the U.S. and Canada, there are several voluntary trading systems on corporate or asset base. The Chicago Climate Exchange (CCX ) is a voluntary trading system functioning since 2003 in the U.S., in which 350 mostly large companies, universities and associations have committed their collective greenhouse emissions by 6%. Lowered is often by large compensatory afforestation projects in the U.S. and Brazil. Another trading system, the Voluntary Market, loses with increasing development of the mechanism for clean development (CDM ) of the Kyoto Protocol in importance.
• In New South Wales, a state of Australia, the NSW Greenhouse Gas Abatement Scheme was established in 2003, a mandatory trading system for electricity generators and industrial companies, which works primarily with afforestation projects.
• For the whole of Australia, the Carbon Pollution Reduction Scheme ( CPRS ) has been proposed, but postponed its introduction for an indefinite period after 2012.
• In New Zealand, a law for the introduction of a trading system was adopted in September 2008, which covers also the first system worldwide agriculture.
• In the Japanese prefecture of Tokyo since the beginning of fiscal year 2010 (April 1 ) to set a binding emission rights system for industry and offices. The actual trade and the sanctioning of excessive emissions began in the spring of 2011. Introducing a nationwide system failed in 2013.

Current commercial systems for other allowances

• In the U.S., the mid-1990s was set up a trading system for sulfur dioxide ( SO2) emissions under the Acid Rain Program.

Historical trading systems

In preparation for the ETS ( Emissions Trading System EU ) have been established in the UK and Denmark for some years smaller trading systems.

Future trading systems

In order to cover the emissions of private consumers, other systems are discussed under the heading "Personal carbon trading ".

Assessment

In a survey of American economists who were working at the state and universities in company, voted in 1990, 78 percent of respondents to the thesis that market-based instruments such as taxes and emissions trading a better approach for limiting the emissions of form than the regulatory definition of pollutant limits. On the positive side was evaluated that the Emissions Trading administrative leave relatively easy to handle and is still efficient. One goal is pretended, and not the (possibly inefficient ) set path to the goal. In this way arises technical progress towards the best solution.

The German Council of Environmental Advisors sees emissions trading as a possible key element of a long-term climate strategy. The attractiveness of this idea lies in the simplicity of the system. It 'll only set a global emissions reduction target, the individual economic control will be left to the market mechanism. Thus, the politically determined environmental objective will be the total cost reaches a minimum cost ( so-called static efficiency). In contrast to individual economic standards of emissions trading beyond giving a permanent incentive to reduce by quantity adjustments and technical progress emissions ( so-called dynamic efficiency). However, the Advisory Council criticized the concrete legal elaboration of emission rights allocation in the National Allocation Plan I.

According to the political scientist Elmar Altvater emissions trading is a "legal structure ", according to which the pollution of the atmosphere is levied at a law; eliminating it draws a valorisation by itself. This legal form of valorisation contrary to the classical political theory, according to which the work enables the acquisition of property rights.

Hans -Werner Sinn of the Ifo Institute supports the call by many environmental economists, according to a global trade in emission allowances for carbon dioxide. He points out, however, that the introduction of such a system must be tuned rapidly and globally, and all must participate. A unilateral approach with the hope to involve all countries at some point in the system, as is currently being pursued by the EU can produce due to the supply-side response with progressive time an increasingly strong comparative price reduction effect. This could even lead to an acceleration of the global pollutant emissions.