Free Term Paper on Emissions Trading

Emissions TradingGreenhouse gas emissions are a new commodity. The Kyoto Protocol, which the United States did not sign, outlines accepted targets for limiting or reducing emissions that thin or destroy the atmospheric conditions which allow life on Earth as we know it today. The targets are expressed as levels of emissions allowed, or “assigned amounts,” per country. They apply to the years 2008–2012. The protocol’s jargon divides allowed emissions into “assigned amount units” (AAUs).

The protocol spells out the details in its “Annex B, Parties” and “Article 17 ” sections. The specifics allow countries with units to spare—that is, that are allotted but not used—to sell their excess capacity to countries that are over their targets or whose industry requires polluting more than is acceptable under the protocol.

As such, the protocol helped to create a new commodity: emission pollution. Mostly, trades are in some form of carbon, such as carbon dioxide, the principal greenhouse gas under discussion. Consequently, carbon now is tracked and traded like any other commodity. This is known as the “carbon market.”

The International Emissions Trading Association (IETA) holds regional meetings throughout the world on the matter. In June 2010, the IETA lobbied U.S. senators to pass a bill on climate change after one proposed by Senator Lisa Murkowski (R-AK) failed in the senate.


I. Definition

II. Harnessing Market Forces for a Safer Environment?

III. U.S. Environmental Policy

IV. Successes

V. Allowances

VI. Determining Compliance

VII. Prominent Trading Systems

VIII. Conclusion


Emissions trading is a regulatory environmental policy to reduce the cost of pollution control by providing economic incentives to regulated industries for achieving reductions in the emissions of pollutants. A central authority, such as an air pollution control district or a government agency, sets limits or caps on each regulated pollutant. Industries that intend to exceed their permitted limits may buy emissions credits from entities that are able to stay below their permitted limits. This transfer is normally referred to as a trade. This is a new policy in the United States. Questions that may become controversies include whether all emissions are measured. Another more basic question is whether society can still allow polluters to buy their way out of responsibility for environmental and community impacts.

Harnessing Market Forces for a Safer Environment?

Market-based environmental policies for reducing pollution include many economic or market-oriented incentives. These include tax credits, emissions fees, or emissions trading. There are many types of emissions trading approaches; the one used by Clean Air Market Programs designed by the Environmental Protection Agency (EPA) is called “allowance trading” or “cap and trade” and has the following key features:

  1. An emissions cap: a limit on the total amount of pollution that can be emitted (released) from all regulated sources (e.g., power plants); the cap is set lower than historical emissions to cause reductions in emissions.
  2. Allowances: an allowance is an authorization to emit a fixed amount of a pollutant.
  3. Measurement: accurate tracking of all emissions.
  4. Flexibility: sources can choose how to reduce emissions, including whether to buy additional allowances from other sources that reduce emissions.
  5. Allowance trading: sources can buy or sell allowances on the open market.
  6. Compliance: at the end of each compliance period, each source must own at least as many allowances as its emissions.

U.S. Environmental Policy

According to the EPA, cap and trade is a policy approach to controlling large amounts of emissions from a group of sources at a cost that is lower than if sources were regulated individually. The approach first sets an overall cap, or maximum amount of emissions per compliance period, that will achieve the desired environmental effects. Permits to emit are then allocated to pollution sources, and the total number of allowances cannot exceed the cap. The main requirement is that pollution sources completely and accurately measure and report all emissions. There is grave concern about this premise. Since not all emissions are counted now, many people are concerned that this lack of specific reporting will only hide pollution.


Cap and trade was first tried in the United States to control emissions that were causing severe acid rain problems over very large areas of the country.

Legislation was passed in 1990 and the first compliance period was 1995. Sulfur dioxide (SO2) emissions have fallen significantly, and costs have been even lower than the designers of the program expected. The U.S. Acid Rain Program has achieved greater emissions reductions in such a short time than any other single program to control air pollution. A cap and trade program also is being used to control SO2 and nitrogen oxides (NOx) in the Los Angeles area. The Regional Clean Air Incentives Market (RECLAIM) program began in 1994.

The regulating agency (e.g., EPA) must:

  • Be able to receive the large amount of emissions and allowance transfer data and assure the quality of those data
  • Be able to determine compliance fairly and accurately
  • Strongly and consistently enforce the rule

Allowance trading is the centerpiece of EPA’s Acid Rain Program, and allowances are the currency with which compliance with the SO2 emissions requirements is achieved. Through the market-based allowance trading system, utilities regulated under the program, rather than a governing agency, decide the most cost-effective way to use available resources to comply with the acid rain requirements of the Clean Air Act. Utilities can reduce emissions by employing energy conservation measures, increasing reliance on renewable energy, reducing usage, employing pollution-control technologies, switching to lower-sulfur fuel, or developing other alternate strategies. Units that reduce their emissions below the number of allowances they hold may trade allowances with other units in their system, sell them to other utilities on the open market or through EPA auctions, or bank them to cover emissions in future years. Allowance trading provides incentives for energy conservation and technology innovation that can both lower the cost of compliance and yield pollution-prevention benefits, although this is controversial.

The Acid Rain Program established a precedent for solving other environmental problems in a way that minimizes the costs to society and promotes new technologies.


An allowance authorizes a unit within a utility or industrial source to emit one ton of SO2 during a given year or any year thereafter. At the end of each year, the unit must hold an amount of allowances at least equal to its annual emissions, that is, a unit that emits 5,000 tons of SO2 must hold at least 5,000 allowances that are usable in that year. However, regardless of how many allowances a unit holds, it is never entitled to exceed the limits set under Title I of the act to protect public health. Allowances are fully marketable commodities. Once allocated, allowances may be bought, sold, traded, or banked for future use. Allowances may not be used for compliance prior to the calendar year for which they are allocated.

Allowances may be bought, sold, and traded by any individual, corporation, or governing body, including brokers, municipalities, environmental groups, and private citizens. The primary participants in allowance trading are officials designated and authorized to represent the owners and operators of electric utility plants that emit SO2.

Determining Compliance

At the end of the year, units must hold in their compliance subaccounts a quantity of allowances equal to or greater than the amount of SO2 emitted during that year. To cover their emissions for the previous year, units must finalize allowance transactions and submit them to the EPA by March 1 to be recorded in their unit accounts. If the unit’s emissions do not exceed its allowances, the remaining allowances are carried forward, or banked, into the next year’s account. If a facility’s emissions exceed its allowances, it must pay a penalty and surrender allowances for the following year to the EPA as excess emission offsets.

Emissions trading or marketable rights have been in use in the United States since the mid-1970s. The advocates of free market environmentalism sometimes use emissions trading or marketable rights systems as examples to support the theory that free markets can handle environmental problems.

The idea is that a central authority will grant an allowance to entities based on a measure of their need or their previous pollution history. For example an allowance for greenhouse gas emissions to a country might be based on total population of the country or on existing emissions of the country. An industrial facility might be granted a license for its current actual emissions. If a given country or facility does not need all of its allowance, it may offer it for sale to another organization that has insufficient allowances for its emission production.

Environmentalists point out that this only increases environmental impacts to the carrying capacity, and beyond, of the environment. They observe that industry is supposed to reduce its emissions to the greatest extent possible under current environmental law. Claims that emissions will somehow be reduced now, or at least shifted to where it could saturate another environment, are not viewed as credible. This lays the foundation for controversy. Communities point out that the cumulative impact of already existing industries is a concern and possible public health risk.

Prominent Trading Systems

The most common policy example of an environmental emissions trading system is the sulfur dioxide trading system contained in the Acid Rain Program of the 1990 Clean Air Act. The program mandates reducing sulfur dioxide emissions by 50 percent between1980 and 2010. In 1997, the state of Illinois adopted a trading program for volatile organic compounds in the Chicago area, called the Emissions Reduction Market System. Beginning in 2000, more than 100 major sources of pollution in eight Illinois counties began trading pollution credits. In 2003, New York State proposed and attained commitments from nine northeastern states to cap and trade carbon dioxide emissions. States and regions of the United States are pursuing more of these policies.

The European Union Greenhouse Gas Emission Trading Scheme is the largest multinational, greenhouse gas emissions trading scheme in the world. It started in January 2005 and all 25 member states of the European Union participate in it.


Emissions trading is an experimental policy coming of age in the United States. However, it exposes major flaws in the country’s environmental regulatory regime. Most environmental information about some of the biggest and unknown environmental impacts comes from self-reporting and may not be accurate. Many industries self-report whether they emit enough to even require any type of permit or oversight. Once regulated, emissions are simply permitted, and amounts are self-reported by industry. Emissions trading may be seen as a free market band-aid to a young, weak, and incomplete public policy of environmental protection. It opens up large holes in the current system and may inflame environmentalists and the public depending on how it is implemented. In a society moving toward concepts like sustainability, emissions trading may be challenged in its present form.


Robert William Collin and Debra Ann Schwartz



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