Introduction

Emissions trading evolves from a system that restricts the aggregate allowable amount of a pollutant and allows market forces to continually move the allowed emissions to the highest value uses.

Market transactions are driven by relative prices of emission reduction opportunities among market participants. For example, a company with a low cost opportunity to reduce emissions below its allocation of emission rights can sell these unneeded rights to a company with limited or uneconomic emission reduction opportunities.

Emissions trading systems can be found in regulated markets (as in the European Union  and in the United States Acid Rain Program) or in markets attempting to address environmental problems prior to regulations (as in the greenhouse gas markets emerging throughout the world).

The trading region is prescribed to the area impacted by the particular pollutant. For greenhouse gases, this means the whole world. Emissions Trading is often described as Emission Reductions Trading.