What’s Carbon Emissions Buying and selling?
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Burning fossil fuels like coal, oil or natural gas moves cars, produces electricity or heat. Unfortunately, it also generates carbon dioxide emissions, and drives climate change.
The European Union has decided to strongly reduce emissions. Obviously this should be done at the lowest costs to the firms and the people.
That is where the Emissions Trading comes into play:
The European Union fixes a carbon emissions target, then divides it into allowances, that each allow to emit one ton of CO2. These are now distributed to the firms. Now, for every ton of emissions, the firm needs to turn in one allowance. If it needs more or less, it can buy or sell them.
So there will be a market for allowances. A firm will now think twice before it emits carbon dioxide:
– If it is cheaper to avoid a ton of emissions and sell an allowance then the firm will do that.
– But also: The firm may choose to emit more and just buy an allowance if that increases profit.
Therefore, the firms will end up in a situation where they all face the same costs if they would want to avoid an additional ton of CO2.
That means: The cheap abatement options are used – and at the same time no firm is forced to use particularly expensive ways to reduce emissions as it can always buy allowances.
In other words: the economy has reached the emissions target in the cheapest way.
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