An emission trading system (ETS) is a powerful policy instrument for managing greenhouse gas (GHG) emissions. Cap and trade 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 programmes because:
- It is the most economically efficient means of reaching a given emissions reduction target;
- It is specifically designed to deliver the environmental objective; and,
- It delivers a clear price signal against which to measure abatement investments.
Trading is not the only policy instrument that governments can 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, an emissions market requires:
NOW AND IN THE LONGER TERM…Carbon pricing opens the door to 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.