The World Bank and the Intergovernmental panel on climate change have concluded that human activities such as fossil fuel combustion have caused higher average temperatures, more violent weather patterns and higher sea levels. Governments, politicians and corporations have started to take steps to curb emissions of carbon dioxide and other greenhouse gases to reduce its imbalance in the atmosphere, and in so doing, diminish the impacts it will have in the near future. While these parties have recognized the importance of significantly reducing emissions in the coming decades, there are currently no policies in the USA to accomplish these goals. At the same time that the need to reduce emissions become more and more apparent, the realization that the world’s current economy is highly carbon-dependent and that shifting to renewable energy sources would be extremely expensive as well, thus compelling governments to approach the problem cautiously. Maybe because of this reality, governments have preferred emissions trading schemes over emissions caps and taxes with no trading. Unlike a cap affecting carbon emitters uniformly, the trading schemes that have been introduced recently allow for a collective cap on emissions under which emitters are held to standards which can be achieved by reducing emissions or by buying carbon credits, which are emissions reductions that have been achieved by a different third party. At this time, the Kyoto Protocol is the most comprehensive of the commitments governments have made toward the ultimate aim of curbing greenhouse gases. Under its umbrella, many of the world’s industrialized nations (excluding the US, which signed but did not ratify owing to economic concerns) agreed to an emissions reduction of 6 to 8 percent from 1990 levels by 2012. Governments are responsible for reducing overall emissions and do this by passing on reduction goals to specific emitters who can reduce their emissions through a slew of methods. The methods include directly reducing carbon emitted as gas or purchasing carbon credits that provide a reduction in place of emissions that cannot be directly reduced. While fossil fuels have played an important role in the development of the world in the past century, financial markets have had an equally important role in creating economic growth. Emissions trading schemes have emerged in the past five years as a method to reduce carbon dioxide emissions through market forces. They are an attractive solution because they grant economic leeway to subject parties. While they carry this benefit, they are not universally ideal. This paper aims to identify the most effective ways in which emissions trading schemes can be used. An analysis of the limitations of emissions trading schemes is conducted with respect to technological and regulatory concerns in addition to different economic sectors. Further analysis of the benefits of large scale emissions trading schemes over other large scale emissions reduction methods is conducted. From this analysis, a full recommendation of strategies which would maximize the effectiveness of an emissions trading scheme is provided.
Cap-and-Trade: The Evolution of an Economic Idea