The idea is that a central authority will grant an allowance to entities based upon a measure of their need. For example an allowance to a country might be based upon total population. An industrial facility might be granted a license for its current actual emissions. If a given country of facility does not need all of its allowance, it may offer it for sale to another organization that has insufficient allowances for its emission production.
The United States began emissions trading after passage of the 1990 Clean Air Act, which authorized the Environmental Protection Agency to put a cap on how much Sulfur dioxide (which causes acid rain) the operator of a fossil-fueled plant was allowed to emit.
In New York State's proposed cap and trade program, the state would set an industry-wide "cap" on carbon dioxide emissions, lower than the current amount, and then give each power plant a target and a deadline. Companies that reduce emissions further than required could then "trade" emission credits with companies who cannot meet their goals. The concept, used with some success in the national Clean Air Act to reduce smog and acid rain emissions, is designed to reduce costs for the regulated businesses. (source: New York Sun)
The Kyoto Protocol will bind ratifying nations to a similar system, with the UNFCCC setting caps for each nation. Under the proposed treaty, nations that emit less than their quota of greenhouse gases will be able to sell emissions credits to polluting nations.
Critics of the Kyoto Protocol see it as a means of forcibly redistributing wealth from the United States to the Third World. This is because the U.S., which produces 25% of the world's greenhouse gas emissions, would likely exceed its quota and would have to buy emissions credits from nations such as China, India, and Russia.
Critics also argue that emissions trading does little to solve pollution problems as groups that do not pollute are granted emissions credits which they then sell. Some environmental groups are attempting to solve this problem by buying credits and refusing to use or sell them.
In private enterprise, emissions trading is very attractive because it does not harm industrial concerns, or require government subsidies. When the price per ton of emissions becomes high-enough, well-managed polluting enterprises can make a rational decision to invest in pollution control equipment, and sell part of their emissions licenses.
In some proposed systems, the government grants tax credits to enterprises. However, these are more expensive for governments, and far less popular for that reason.
Emissions trading is attractive to public-interest environmental organizations, because in an open market, they can purchase, and retire emissions licenses. This permanently reduces the total amount of pollution produced.
The main effect is to control a pollutant in a socially-controlled way. This will assure that the effects of humans on the environment are controlled, rather than accidental.
An important secondary effect is to disperse pollution sources. This occurs because the operators of polluting enterprises will naturally sell as many licenses as they can afford to. This is good, because at any given location, concentrations of a pollutant will be significantly less.
A final effect is that if the total permitted amounts are fixed or decreasing, public interest groups can decrease them further by purchasing licenses. The net effect is to drive total emissions toward zero with no economic harm to industry.Current trading systems
Effects on Society and Enterprise
Effects on the Environment