ABSTRACT
Emissions trading is one of a range of policy instruments available to mitigate greenhouse gas emissions. It involves putting a limit on the quantity of greenhouse gas emissions (usually converted to their carbon dioxide equivalent [CO2e]) that can be emitted to the atmosphere over a set period of time – the “emissions cap.” Trading scheme participants (typically firms or production facilities) are then permitted to buy and sell emission allowances in order to meet their emissions cap. Emissions trading operates like a commodity market where the price of the commodity is determined by the market demand relative to its supply: in this instance, it is greenhouse gas emission allowances that are the commodities traded. It is the price of the emission allowance (often referred to as the carbon price) that provides the financial incentive to limit emissions.1
