Emission trading is flourishing across the world, opening up a, hitherto, unknown market. So is you were wondering what the whole business is about, read on.

What is emission trading?

Emission trading is an attempt to control pollution by offering economic incentives for those who pollute less. Under the Kyoto Protocol, nations that emit less than their quota of greenhouse gases will be able to sell emissions credits to polluting nations. In emission trading, a central authority (usually a government agency) sets up a cap on the amount of pollutants that can be emitted. This allowance is called a credit. When the pollutant emitted is carbon dioxide it is called carbon credit. If a company has to exceed the cap set for it, it has to buy the extra allowance from those who pollute less. Such transfers of carbon credits are called carbon trading. In effect, the buyer is being fined for polluting, while the seller is being rewarded for having reduced emissions.

Where does emission trading take place?

There are active trading programs in several pollutants. For greenhouse gases the largest market is the European Union Emission Trading Scheme. In the United States there is a national market to reduce acid rain and several regional markets in nitrous oxide. Markets for other pollutants tend to be smaller and more localized.

Who are the gainers?

Countries like India and China are not required to reduce their emissions since they are within the prescribed limits. Hence many industries in these countries are raking in profits by selling their carbon credits in the international emissions market.

What are the arguments against carbon trading?

Critics say pollution trading is ridiculous. They advocate for policies that reduce emission. Carbon trading, they say, provides elaborate get-out clauses for the biggest polluters. Also licences and credits will have no value without effective enforcement as industries may find it far less expensive to corrupt inspectors than to purchase emission licences.