What is emissions trade?

Emissions trade is an economic instrument that aims to further control air pollution by providing economic incentives to companies. A governmental or other authority sets a limit (a ‘cap’) over a geographic area on the amount of a gas pollutant that can be emitted per time (usually per year). The authority quantifies the cap into tons of NOx/SOx etc. and allocates all targeted installations with ‘permits’, that is, permission credits to emit. One credit corresponds to one ton. Companies must not exceed their permitted emissions, or they will be penalised. When one installation reduces emissions further than its allocated permits suggest, it has the possibility to trade the over-reductions in an emissions market.

This means that companies are flexible to organise their annual emissions either by reducing emissions in-house (using abatement technologies), purchasing them from the emissions market or a combination of both, which is more often the case. In an emissions trade situation, installations with low abatement costs are encouraged to reduce more that they are obliged to and sell these reductions in the market, where companies with higher costs can purchase them. Although emissions trade does not compromise the total reductions in tons, it decreases the costs for environmental investments by far, as reductions are physically achieved where is less expensive.