What is cap and trade in business

wish and reality

The EU is already making a significant contribution to this and is making use of, among other things, the instrument of emissions trading (cap and trade).

Such emissions markets have also emerged in other parts of the world, with the European Union's emissions trading system (EU-ETS), which has existed since 2005, accounts for around 73 percent of the global carbon market. The basis of such a market is provided by the Kyoto Protocol, according to which countries can sell emission quantities by which they fall below the maximum amount they have promised in the form of "Assigned Amount Units" (AAUs) to other countries.

In addition to interstate trade and the EU ETS, there are a number of regional trading systems. For example, in the north-east of the USA, where ten states have been trading certificates in the so-called Regional Greenhousegas Allowances Initiative (RGGI) since 2009 in order to reduce emissions from electricity generation. Participants can also voluntarily trade emission certificates within the Chicago Climate Exchange (CCX) in order to familiarize themselves with the instrument. New South Wales, a federal state of Australia, has been operating an emissions trading system (NSW GGRS) for the power generation sector since 2003. There are already three regional emissions trading systems in China, one of them in Shanghai, which is considered a pilot project for the introduction of a national system. In Mexico, too, some companies voluntarily participate in emissions trading.

Apart from the EU-ETS and the mentioned sidelines, however, good intentions and implementation are still far apart in emissions trading systems. Even large emitters such as Brazil and India are dealing with this instrument, but outside of Europe, a mandatory, nationwide cap-and-trade system has only been adopted in New Zealand. It is to be modified by the start in 2013, taking into account the international climate protection negotiations. In Australia, the government has long pushed for the adoption of a Carbon Pollution Reduction Scheme (CPRS), but will not take up the project again until 2012 after several failures in the legislative process. The introduction of a cap-and-trade program in the USA is considered to have failed for the time being, and in Japan, where a pilot system has been in operation in Tokyo since 2010, the decision on nationwide trade has been postponed indefinitely.

States often suspect competitive disadvantages in such a system, since a price for emissions would make energy generation more expensive. A globally uniform price for emissions rights could theoretically allay competition concerns and at the same time bring out the economic efficiency advantages of emissions trading. CO2 would be reduced where the costs for it are particularly low, which is particularly the case in developing countries. So far, this potential has only been insufficiently exploited through emission reduction projects in developing countries (Clean Development Mechansim - CDM). For this or for reduction projects in other industrialized countries (Joint Implementation - JI), countries receive special emissions credits (Primary and Secondary Kyoto Offsets) within the framework of the Kyoto treaty, which can also be traded - in some cases also in other emissions trading systems. However, an international market for emission rights that provides reliable price signals for all emitters currently only exists on paper.

State-initiated systems could form a global market, provided they are compatible with one another. So far, however, there are considerable differences in the systems introduced and planned, which is why some states have been advising within the International Carbon Action Partnership (ICAP) since 2007 on the connection of segmented carbon markets. Uniform answers can be found primarily to questions about which emitters are to be included in trading, how the monitoring and reporting obligations are to be structured or to what extent and in what way the emission rights are to be issued. Such design options have a substantial impact on the issue price. A system with nationally different regulations would therefore not eliminate the unequal competitive positions of the trading participants and would make the system connection more difficult overall. The advantage of competitive neutrality derived from global emissions trading would be counteracted in practice.