Emissions trading

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Emissions refers to greenhouse gases produced (for the most part) by industrial sources such as power plants, manufacturers and vehicles. These gases are regarded as pollutants to the atmosphere and several schemes have been set up to help reduce the gases by trading credits on them. Emissions trading has become one of the fastest growing commodities markets in the wake of the Kyoto Treaty, which helped set the framework for mandatory emissions reduction schemes such as cap-and-trade markets.

The most commonly traded emissions are carbon dioxide (CO2), sulfur dioxide (SO2) and nitrous oxide.

Emissions trading allows one source to increase emissions of greenhouse gases when another source reduces them, theoretically maintaining an overall constant emission level.

The limits on greenhouse gas emissions set by the Kyoto Protocol are a way of assigning monetary value to the earth's shared atmosphere. The Kyoto Protocol sets limits on total emissions by the world's major economies, a prescribed number of emission units.

The Protocol allows countries that have emissions units to spare - emissions permitted them but not "used" - to sell this excess capacity to countries that are over their targets. The excess units are called "credits" or "allowances" and can be traded on emissions markets such as the European Climate Exchange and the Chicago Climate Exchange.

Programs like this are known as "cap and trade" programs because they set a cap or limit on the total amount of pollution that can be released from regulated sources and then allow participants to use their extra emission allowances, or credits, as currency on the open market. The cap is set lower than historical emissions in order to reduce emissions.

At the end of each compliance period, each source must own at least as many allowances as its emissions.^[1]

Countries can get credit for reducing greenhouse gas totals by planting or expanding forests; for carrying out "joint implementation projects" with other developed countries--usually countries with "transition economies"; and for projects under the Protocol's Clean Development Mechanism, which involves funding activities to reduce emissions by developing nations. Credits earned this way may be bought and sold in the emissions market or "banked" for future use.^[2]

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