Why Emissions Trading?
An emission trading system is a powerful policy instrument for managing industrial greenhouse gas (GHG) emissions. The presence of a trading system encourages operational excellence and provides an incentive and path for the deployment of new and existing technologies.
As a policy instrument, emissions trading is preferable to taxes, inflexible command-and-control regulation, and taxpayer-funded support programs because:
- It is the most economically efficient means of reaching a given emissions reduction cap or target
- It is specifically designed to deliver the environmental objective
- It delivers a clear price signal against which to measure abatement investments
Trading is not the only policy instrument that governments should use. But failing to give a major role to trading will impose unnecessary costs and create policy confusion.
Trading responds to the central objective of climate change policy of efficiently directing capital within markets towards low-to-zero carbon emissions investments. To achieve this aim, an emissions market requires:
- Scarcity of emission allowances – the unit of “Carbon Reduction Value” – in order to create the price signal for businesses and governments alike
- Long-term clarity and predictability of rules, targets and the regulatory systems guiding emissions markets worldwide
- Adequate compliance periods, allowing companies to structure a “make or buy” approach to their emissions reductions over time
- Cost containment provisions, allowing efficiency in discovering of lowest-cost solutions wherever they are to be found Offsets-based mechanisms offer the opportunity for countries or sectors that have yet to introduce an allowance-based approach to participate in the market
The emissions markets should mature and grow, to evolve and provide wide GHG coverage:
This will lead to a global price for carbon and a trading system as exists in currency, commodity and debt markets. Ensuring that carbon has the proper links in all of these markets will require:
- Harmonized benchmarks, ambitions, rules, monitoring and enforcement within an array of approaches
- Structures and regulations to link different approaches and systems, directly or by exchange rates or market instruments
- Worldwide offset mechanisms based on verifiable emission reduction projects and programs
NOW AND IN THE LONGER TERM…
A global carbon price gives birth to a new commodity, and a new set of investment and financing opportunities. These opportunities can link the metrics and methods for GHG abatement with larger capital markets flows aimed at financing low-to-zero carbon investments all over the world.