From Beijing to London: An introduction to Emission Trading Systems (ETS) around the world
Emission Trading Systems (ETS) are market-based approaches designed to control pollution by providing economic incentives for reducing emissions of pollutants. Essentially, governments set a cap on the total amount of greenhouse gases that can be emitted by covered entities. Companies receive or buy emission allowances, which they can trade with each other as needed. The goal is to create financial motivation for companies to reduce their emissions, as those that can cut emissions cheaply can sell their excess allowances to companies facing higher reduction costs.
One of the most prominent ETS is the European Union Emissions Trading System (EU ETS), which is the world’s first major carbon market and remains its largest. Covering power and heat generation, energy-intensive industries, and intra-European aviation, the EU ETS has progressively tightened its cap on emissions, driving significant reductions in greenhouse gases. Another notable system is the Regional Greenhouse Gas Initiative (RGGI) in the United States, involving several northeastern states and focusing primarily on power sector emissions. China has also launched the world's largest carbon market in terms of emissions covered, initially targeting the power sector with plans to expand to other industries such as cement and steel.
In North America, the RGGI has cut emissions by over 50% since 2009, demonstrating the effectiveness of regional cooperation. California's Cap-and-Trade Program, covering about 85% of the state’s emissions, includes industries, utilities, and transportation fuels, and is linked with Quebec's system, creating a broader carbon market.
China’s National ETS, launched in 2021, is the world’s largest in terms of CO2 emissions covered. Initially, it includes the power sector, with plans to expand to other industries such as cement, steel, and aluminum. The system aims to help China achieve its goal of carbon neutrality by 2060. However, challenges include ensuring compliance and transparency across such a vast and diverse industrial landscape.
Other countries with significant ETS include South Korea, which launched its system in 2015, covering about two-thirds of national emissions from sectors like power, steel, and petrochemicals. New Zealand has had an ETS since 2008, unique for its inclusion of the forestry sector. Japan is developing regional systems in Tokyo and Saitama, with plans to expand nationally.
Several emerging economies are also exploring or implementing ETS. For example, Mexico, Colombia, and Chile are at various stages of establishing their own trading systems. These efforts receive international support and aim to build capacities for measuring, reporting, and verifying emissions.
Comparing these systems, the EU ETS is often seen as the most comprehensive, with stringent caps and broad sectoral coverage. The RGGI, while narrower in scope, has effectively reduced power sector emissions. China's system represents a significant development due to the country’s large volume of emissions, though it faces challenges in enforcement and transparency. South Korea and New Zealand's systems also highlight diverse approaches tailored to their specific economic contexts.
Despite their successes, ETS face several challenges. Market stability can be an issue, as seen in the EU ETS's early years when excess allowances led to price crashes. The introduction of the Market Stability Reserve has addressed this by adjusting the supply of allowances to balance the market. Furthermore, ETS must deal with the risk of carbon leakage, where companies relocate production to countries with laxer emission constraints. Solutions include implementing border carbon adjustments or offering free allowances to industries at risk of relocation.
Looking forward, the global landscape of ETS is expected to expand and evolve. More countries are considering or developing their own systems, and there is a push towards linking different ETS to create larger, more flexible markets. Innovations such as incorporating carbon offsets and integrating new sectors like shipping and road transport into existing systems will be crucial. The ultimate goal is to ensure these systems can effectively contribute to global climate targets, driving down emissions while fostering economic growth and technological innovation. The future of ETS looks promising, with growing interest and collaboration across borders, innovations in carbon accounting, and new sectoral inclusions enhancing their efficacy.