Emissions Trading

Economists have urged the use of "market-based" instruments such as emissions trading to address environmental problems instead of prescriptive "command and control" regulation. Emissions trading aims to ensure emissions reductions take place where the cost of the reduction is lowest.  Emissions are capped at a certain level which cannot be exceeded.  Participants are allocated allowances, each allowance representing a ton of carbon dioxide equivalent (CO2e).  Participants can then buy or sell allowances amongst each other – allowing flexibility to meet reduction targets.  The result is the establishment of a carbon market and a price for carbon that reflects the most cost-effective ways of reducing emissions. 

The first large scale emissions trading system was the Acid Rain Program in the United States in 1995. The U.S. Environmental Protection Agency (EPA) set a decreasing cap on total SO2 emissions for each of the following several years, aiming to reduce overall emissions to 50% of 1980 levels. The system proved to be very successful and served as an example to the Kyoto Protocol and the EU Emissions Trading Scheme.

In the Netherlands, citizens can now purchase CO2 emissions allowances and immediately retire them through the Dutch environmental organization Natuur en Milieu. See their website www.co2markt.eu. Once retired, the CO2 emissions allowance cannot be used by industry anymore.