Collectively, carbon trading companies must adhere to a general cap on total carbon emissions.
Emissions refer to pollution that is released into the air. An emissions trading system refers to a program that offers flexibility and accountability where emission limits have been set. This is done by issuing credits to polluters that can be traded between those that produce less pollution and those that produce more.
The Kyoto Protocol is an international agreement that many countries have signed as part of an agreement aimed at reducing their greenhouse gas emissions. Those who have signed this agreement are generally referred to as signatories. With the birth of this agreement, a concept known as the emissions trading system was born. The agreement is designed to manage emission levels by issuing Assigned Quantity Units (AAUs) to signatories.
The AAUs determined how much pollution each signatory could emit. The emissions trading system is designed to allow countries to benefit from using fewer AAUs than allocated. They could profit by selling their surplus AAUs to countries that needed more than they were given.
The emissions trading system was also designed to function as a kind of sanctions system. If a country’s emissions exceeded their AAUs, they would have to buy credits. Therefore, this could be seen as a surcharge for exceeding the given threshold.
In many cases, the emissions trading system is known as a carbon market. This is because carbon dioxide is one of the most emitted gases and can be the most difficult to reduce. Therefore, the exchange of carbon dioxide credits has prevailed.
In the Kyoto Protocol, there are other types of units that are issued and can be exchanged. For example, there is the Certified Emissions Reduction (CER) program. Credits can be earned through this program when a signatory develops an emissions reduction project in a developing country. The credits obtained can be sold or used to increase the holder’s emission limits.
An emissions trading system is not always international. The European Union (EU) has developed the European Union Greenhouse Gas Emissions Trading System (EU ETS). This system was developed to allow trade between various sectors of the different EU member states.
The Kyoto Protocol also allows for an emissions trading system to be developed at the national level. This can be achieved if a country’s AAUs are subdivided among the largest polluters in the country. This will give those parties individual emission limits. In the event that an entity has excess AAUs, they can be sold to national entities that have exceeded their limits or they can be sold back to national authorities.