Carbon Emissions Trading

Carbon emissions trading is based on the principle of cap and trade, widely acknowledged to have its roots in the US SO2 trading programme that successfully capped sulphur emissions from US power plants at a fraction of the modelled cost.

The total number of carbon allowances circulating in each emissions trading system is capped. The key to cap and trade's efficiency is that free trade is permitted such that those with the lowest cost of abatement subsidise those with the highest cost, for profit. Like in well-established equities markets, liquidity is best served by allowing anybody and everybody to participate in the trading of emissions allowances, from installations covered under the scheme to private investors. Cap and trade is expected to feature prominently in international negotiations to cap global carbon emissions because of it's track record of delivering greenhouse gas reductions at low prices and more or less efficiently sending price signals for further reductions (where the efficiency is dictated by the rule setting policy makers, for example longer-term regulatory certainty allows a longer term price signal).

It is also much more precise, and significantly more flexible, than the much touted alternative market mechanism, carbon tax.