The Emissions Trading Scheme (ETS) is a market-based tool designed to reduce greenhouse gas (GHG) emissions by setting a cap on the total amount of emissions allowed and enabling the trading of emission allowances. It is widely used to incentivize companies to adopt cleaner technologies and practices by assigning a monetary value to carbon emissions.
How It Works:
- Cap: A maximum limit is set on the total emissions that can be released by all participants in the system. This cap is reduced over time to encourage gradual emission reductions.
- Allowances: Participants receive or buy emission allowances, each permitting them to emit a specific amount of GHGs (e.g., one ton of CO₂ equivalent).
- Trading: Companies that emit less than their allowances can sell the surplus to those exceeding their limits, creating a financial incentive for efficiency and innovation.
Benefits:
- Encourages cost-effective emission reductions by letting the market determine the price of carbon.
- Provides a flexible mechanism for companies to comply with climate targets.
- Supports the transition to a low-carbon economy by generating revenue that can be reinvested in renewable energy and climate projects.