Emission trading schemes - case studies

Environmental policy.

(ETS)

Author: Charitarth Sindhu, Environmental Sustainability & ESG Consultant

Worldwide implementation of Emission Trading Systems (ETS) is gaining traction in the urgent fight against climate change. These are also called cap-and-trade mechanisms.

These systems are designed to curb greenhouse gas emissions by placing a cap on total allowable emissions and allowing trading of emission permits among participating entities.

European Union Emissions Trading System (EU ETS)

The EU ETS is the European Union's method to combat climate change by reducing greenhouse gas emissions.

Established in 2005, it operates on a cap-and-trade principle, wherein a cap is set on the total amount of greenhouse gases that can be emitted by certain industries. Participants in the system are allocated emissions allowances, which they can trade amongst themselves.

Over a period of time, the cap is tightened, reducing the total emissions allowed and incentivising industries to invest in cleaner technologies or purchase additional allowances. By putting a price on carbon emissions, the EU ETS encourages businesses to innovate and adopt sustainable practices while contributing to the EU's broader climate goals.

Additionally, the system is complemented by measures to prevent carbon leakage, ensuring that industries do not relocate outside the EU to avoid regulations.

California Cap-and-Trade Program

California's Cap-and-Trade Program was established in 2013 under the California Global Warming Solutions Act (AB 32). The program sets a statewide cap on emissions from major industries, such as power plants, refineries, and manufacturing facilities, gradually reducing this cap over time to achieve ambitious climate targets.

By creating a market for carbon allowances, California's cap-and-trade system encourages companies to invest in cleaner technologies, reduce their carbon footprint, and foster innovation in sustainable practices. Through regular auctions and stringent compliance mechanisms, the program ensures transparency, accountability, and efficacy in emission reduction efforts.

Regional Greenhouse Gas Initiative (RGGI)

The Regional Greenhouse Gas Initiative (RGGI) stands as an example of regional collaboration in the United States to combat climate change. Established in 2009, RGGI comprises nine north-eastern states, including Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont, united in their commitment to reduce greenhouse gas emissions from the power sector.

Through a cap-and-trade approach, RGGI sets a limit on carbon dioxide emissions from power plants, subsequently auctioning allowances and reinvesting the proceeds into clean energy initiatives and energy efficiency programs.

This initiative serves as a crucial mechanism for mitigating climate change and fostering economic growth and innovation in participating states. By demonstrating the effectiveness of regional cooperation in addressing environmental challenges, RGGI has inspired similar efforts worldwide.

China's National Emissions Trading Scheme (ETS)

China, the world's largest emitter of greenhouse gases, took a significant step in its efforts to combat climate change with the introduction of its national emissions trading scheme (ETS). Launched in 2021, this initiative marked a monumental stride towards achieving China's ambitious climate targets, including peaking carbon emissions by 2030 and attaining carbon neutrality by 2060.

Under the scheme, initially targeting the power sector and encompassing around 2,200 power plants, China aims to establish the world's largest carbon market, surpassing even the European Union's ETS.

Korean Emissions Trading Scheme (KETS)

The Korea Emissions Trading Scheme (KETS) is South Korea's approach to combating climate change through innovative carbon trading measures. Introduced in 2015, KETS quickly emerged as Asia's second-largest carbon market, covering a substantial portion of the country's emissions across diverse sectors.

This comprehensive scheme employs a cap-and-trade mechanism to incentivize emission reductions, fostering a transition towards a low-carbon economy while simultaneously promoting sustainable growth.

Under KETS, large commercial and industrial facilities are subject to emission caps, encouraging them to adopt cleaner technologies and practices.

New Zealand Emissions Trading Scheme (NZ ETS)

Administered by the national government of New Zealand, the NZ ETS works on a market-based mechanism. It places a cap on greenhouse gas emissions while allowing for the trading of emission units, incentivising industries to reduce their carbon footprint.

Established in 2008, the scheme covers a wide array of sectors, including energy, industrial processes, waste, and forestry, making it one of the most comprehensive carbon pricing mechanisms globally.

Through continuous refinement and policy adjustments, the NZ ETS aims to drive emission reductions, foster innovation in clean technologies, and facilitate the transition to a low-carbon economy.

Through active engagement with stakeholders, including businesses, communities, and indigenous groups, the government seeks to ensure the effectiveness and fairness of the scheme while maximizing its contribution to national emission reduction targets.

Tokyo Emissions Trading Scheme

The Tokyo Cap-and-Trade Program, an exemplary initiative in the fight against climate change, stands as a beacon of innovation and collaboration.

Established in 2010, this program represents Japan's efforts to curb greenhouse gas emissions, particularly within the bustling metropolitan area of Tokyo. By targeting large commercial and industrial facilities, the program aims to drive energy conservation and promote sustainable practices, thereby contributing to global efforts to mitigate climate change.

As a testament to its success, this program serves as a model for other cities and regions worldwide, demonstrating the transformative impact of local initiatives in advancing the broader goals of the Paris Agreement and the United Nations Sustainable Development Goals.

Western Climate Initiative (WCI)

The WCI collaborates with US states and Canadian provinces to develop and implement effective cap-and-trade programs. This comprehensive approach encompasses a range of sectors, from energy production to transportation, aiming to create a sustainable framework for emissions reduction.

At the heart of WCI's initiatives lies a commitment to fostering collaboration and sharing best practices among participating jurisdictions. By facilitating knowledge exchange and cooperation, WCI empowers member states and provinces to develop tailored strategies that align with their unique environmental and economic landscapes.

See also

• Cap and trade
• Carbon Border Adjustment Mechanism
• Carbon trading
• Emissions
• Emission trading scheme
• EU Emissions Trading System (EU ETS)
• Streamlined Energy and Carbon Reporting
• UK Emissions Trading Scheme (UK ETS)

Other resources

• Regional Greenhouse Gas Initiative (RGGI), Inc.
• What is the EU ETS?, European Union ETS

• Cap and Trade Program, California Air Resources Board

• China’s emission trading scheme, International Energy Agency

• Korean Emissions Trading Scheme, Asian Development Bank

• New Zealand Emissions Trading Scheme, NZ Ministry of Environment

• Tokyo Cap-and-Trade Program, United Nations Department of Economic and Social Affairs

• Program Design and Implementation, Western Climate Initiative (WCI)