Rationale Behind Emissions Trading Schemes

Rationale Behind Emissions Trading Schemes

Nicola Steen

30 years: Emissions Trading Schemes

In this video, Nicola Steen first explains the basics of greenhouse gases and then explains the theory of emissions trading schemes and how they emerged as a potential solution to limit the rising greenhouse gas levels.

In this video, Nicola Steen first explains the basics of greenhouse gases and then explains the theory of emissions trading schemes and how they emerged as a potential solution to limit the rising greenhouse gas levels.

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Rationale Behind Emissions Trading Schemes

8 mins 56 secs

Overview

Climate change is arguably the world’s biggest problem, not just for us today, but for future generations too. This is a result of the rising level of greenhouse gases. One critical point is that it doesn’t matter where in the world a tonne of greenhouse gases is emitted, it has the same effect on global climate change. Capping and trading emissions presents itself as a cost-efficient and effective way to ensure a global cap is met. By enabling capital to be spend efficiently, it frees up funds to make more change happen faster

Key learning objectives:

  • Understand the main greenhouse gases and their Global Warming Potential (GWP)

  • Comprehend the theory of capping and trading emissions

  • Understand how the suggested implementation of emissions trading works in practice

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Summary

What are greenhouse gases and what is their impact?

The six main greenhouse gases addressed initially at Kyoto Protocol of 1997 were carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride. Each of these gases have different characteristics and varying impacts on the climate. This is referred to as their Global Warming Potential (GWP). However, carbon dioxide serves as a common denominator, and the GWP of all gases is measured relative to carbon dioxide in metric tonnes of CO2e, tCO2e.’ This can be understood as follows: nitrous oxide has a GWP of 298 which implies it is 298 times as potent as carbon dioxide. 1tN2O = 298tCO2e.

How can capping and trading emissions help stop rising greenhouse gas emissions?

The initial theory of capping and trading emissions had three steps:

  • Calculate and place a cap on total global emissions
  • Share out permits to reach this global cap on an equal per capita basis
  • Buy and sell permits as necessary to cover emissions

The theory was originally suggested by Professor Michael Grubb in his report The Greenhouse Effect: Negotiating Targets (1989).

The main fact underpinning the theory of capping and trading emissions is that although gases are emitted from different locations, the effect on the global environment is the same; the environment does not distinguish where the emissions - or reductions - come from. If permits were allocated on an equal per capita basis, industrialised countries would not have enough permits to cover their emissions while developing countries would have an excess that they could sell.  The countries short of permits would consider whether they could reduce their own emissions (to reach their permitted allocation) or buy more permits from other countries.(Michael Grubb suggested the currency for buying permit would be technology transfer.) In this way, the system not only ensures the global cap is not crossed, but also ensures that it is done in an economic and cost efficient manner. 

How capping and trading works in a practical scenario?

Consider a scenario where factory A emits 10,000tCO2e and factory B emits 8,000tCO2e. If an emissions cap of 9,0000tCO2e is placed and 9,000 permits each to cover 1tCO2e are allocated to both factories, factory A is 1000 permits short. To meet the regulations, they have to reduce emissions either by reducing activity and output, buying new more efficient plant or equipment or by buying an extra 1000 permits from another entity in the market (factory B). If permits are the cheapest option, these will be bought.  As the total number of permits is limited to the mandated pre-agreed total emissions cap, this means both factories meet the regulations and also the environmental goal is met - and all at least cost.

Now free to watch

This video is now available for free. It is also part of a premium, accredited video course. Speak to an expert today to watch more.

Nicola Steen

Nicola Steen

Nicola Steen has been working on using market mechanisms to reduce levels of greenhouse gas emissions since 1989. She helped instigate the pan-industry and government discussions that led to the UK Emissions Trading Group and the first pan-economy emissions trading scheme in the world. Most recently, she is working again on the voluntary carbon markets, seeing new capital and attention moving towards bolstering sustainable solutions.

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