Effectiveness of Emissions Trading in Reducing Global Warming

With increased industrialization and urbanization, the modern day challenge for mankind has been reducing the adverse environmental impacts of his activities. Activities such as industrial processes, fuel combustion, agriculture and solvent use have been identified to be main contributors to green house gases (GHG) emissions hence to global warming (United Nations – UN 1998). Recognizing the adverse implications that unabated increase in global warming poses to the well being of future generations; various environmental policies have been instituted to reduce pollutants.

One of the main actions towards reduction of pollutants was the Kyoto Protocol. The Kyoto protocol is an agreement, among 169 countries whose contribution to GHG emissions is high, that put limits (caps) to the amount of emissions that various countries were permitted (UN 1998). Subsequent to the provisions of the protocol various environmental policies have been instituted that fall either under market-based instruments or “command-and-control regulations” (Stavins 2001, p.1). While command-and-control regulations – such as those specifying the equipments firms must use to comply with a pollution-reduction regulation – have uniform set of standards for all firms; market-based instruments allow flexibility for firms in such ways as offering tradable permits (Stavins 2001).

The purpose of this paper is to critically assess the effectiveness of emissions trading – one of the market-based instruments – in reducing global warming. The paper will assess whether the use of emissions trading as a policy to reduce pollutants is a policy in the right direction or just a ploy that only rearranges the contributors to emissions without a significant effect of reducing overall emissions. First a brief overview of what emissions trading constitutes is presented with its advantages over other preventative methods and disadvantages being discussed. An opinion as to whether emissions trading presents a prudent method to control global warming is then presented.

Emissions trading is one of the market-based instruments that are used to encourage reduction of pollution. The concept involves either a cap and trade system or a baseline-credit system (Stavins 2001; Jaffe & Stavins 2007). Under the cap and trade system, a central authority (usually a government institution) establishes an overall allowable level of pollution which is in turn apportioned to firms as pollution permits that can be exchanged (Stavins 2001; Jaffe & Stavins 2007). In such a policy, entities whose operations emit more than their permitted share need to purchase extended capacity from the firms whose emissions is below their allocated share to avoid being penalized (Stavins 2001; Jaffe & Stavins 2007). These latter firms with lower-than-their-cap emissions, in addition to trading their surpluses, can also bank them for future use if they perceive their future emissions to be higher (Stavins 2001; Jaffe & Stavins 2007). In the case of the two scenarios, where firms have surpluses and where their emissions surpass their allocated permit, trading would be the cost-effective option in two cases. First, when the current permit price exceeds the costs of marginal reductions in emissions, firms would be motivated to sell their permits whereas a vice versa scenario – higher marginal abatement costs than permit prices – would provide an incentive for firms to buy the permits (Stavins 2001; Yeoh 2008). The long-term goal of such a trade is to minimize emissions by providing firms with a profitable investment when they do so (Stavins 2001). An example of this system is the US Acid rain program established by the Environmental Protection Agency through the 1990 amendments to the Clean Air Act aimed at reducing SO­2 emissions (Jaffe & Stavins 2007).

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