Abstract
Climate change is being exacerbated by the emissions of globe-warming greenhouse gases (GHGs) as a consequence of economic activities associated with energy, industry, transportation, and land use. From an economic viewpoint, the Earth’s climate is a public good, and pollution a negative externality; such change therefore constitutes market failure. Controlling air pollution by utilizing economic mechanisms represents an important change in environmental thinking – literally a paradigm shift away from historical command-and-control engineering systems. Today, this approach is being utilized to mitigate the emissions of GHGs, addressing the pollution externality by putting a price on carbon. The international carbon market, largely developed as a result of the Kyoto Protocol, had a total value of $176 billion in 2011, but it has decreased significantly in recent years. With the addition of China and other national and subnational programs, however, it is expected that it will once again increase, as a larger and larger portion of emitted GHGs come under such regulatory purview. Historically, the largest component of that market has been the European Union’s Emission Trading Scheme (EU ETS), which represents a regional market designed first to assist Europe in achieving compliance with the Protocol’s requirements, and now is a cornerstone of the EU’s policy to combat climate change. It also has links to the Protocol’s project-based mechanisms, the Clean Development Mechanism (CDM), and Joint Implementation (JI), which help minimize compliance costs. China’s nascent market – currently seven pilot schemes, but expected to become a national program in 2016 – should ultimately become twice as large as the EU ETS. Other carbon markets created in numerous countries (e.g., the U.S., Japan, South Korea, etc.) as well as a voluntary market are also expected to make significant contributions. This chapter discusses the structure of these emissions trading carbon markets, the theory behind their development, their historical evolution, ongoing governance challenges, and future prospects.
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Raufer, R., Coussy, P., Freeman, C., Iyer, S. (2017). Emissions Trading. In: Chen, WY., Suzuki, T., Lackner, M. (eds) Handbook of Climate Change Mitigation and Adaptation. Springer, Cham. https://doi.org/10.1007/978-3-319-14409-2_8
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