Emissions trading

Norway’s Prime Minister Jens Stoltenberg compares the CO₂ emission trading system with drink vouchers at a company party. The simplest way to cut emissions is to set a limit on how much can be emitted. Since last year’s party ended up as a drunken orgy, the management has decided that alcohol consumption should be restricted somewhat this year. Therefore they issue fewer drink vouchers. 

The emission trading system works in the same way. The fewer the vouchers, the lower the emissions – even if some of the party guests trade vouchers between themselves. What counts are the total CO₂ emissions. The authorities issue allowances that are lower than the expected emissions from companies, which means that the companies must either reduce their emissions or buy allowances from some company that has managed to reduce its emissions. The system puts a price on pollution and a financial gain is derived from cutting emissions. In the CO₂ market, competition will help ensure that the cheapest measures are carried out first. Europe has had emission trading for power stations and for some industrial sectors since 2005.

But if the emission trading is really to do its’ job, all countries and all sectors must be subject to it, so that commercial advantage will not be gained by establishing plants overseas. The emissions limit must also be credible and long-term. If investors are to buy expensive zero-emission technology they must feel sure that climate policy will maintain a steady course over the next 20-30 years. Even a good “cap-and-trade” system has its limitations. The market chooses the cheapest solutions first – and defers the more expensive ones. This can cost precious time when we really need major cuts in emissions quickly.