Editing Emissions trading (section)

==Introduction==
{{Green economics sidebar}}

[[Pollution]] is a prime example of a market externality. An [[externality]] is an effect of some activity on an entity (such as a person) that is not party to a market transaction related to that activity. Emissions trading is a market-based approach to address pollution. The overall goal of an emissions trading plan is to minimize the cost of meeting a set [[emissions target]].<ref name="cap101">[http://www.americanprogress.org/issues/2008/01/capandtrade101.html Cap and Trade 101] {{Webarchive|url=https://web.archive.org/web/20120424171855/http://www.americanprogress.org/issues/2008/01/capandtrade101.html |date=2012-04-24 }}, [[Center for American Progress]], January 16, 2008.</ref>
In an emissions trading system, the government sets an overall limit on emissions, and defines permits (also called allowances), or limited authorizations to emit, up to the level of the overall limit. The government may sell the permits, but in many existing schemes, it gives permits to participants (regulated polluters) equal to each participant's baseline emissions. The baseline is determined by reference to the participant's historical emissions. To demonstrate compliance, a participant must hold permits at least equal to the quantity of pollution it actually emitted during the time period. If every participant complies, the total pollution emitted will be at most equal to the sum of individual limits.<ref name="boswall">Boswall, J. and Lee, R. (2002). Economics, ethics and the environment. London: Cavendish. pp.62–66.</ref> Because permits can be bought and sold, a participant can choose either to use its permits exactly (by reducing its own emissions); or to emit less than its permits, and perhaps sell the excess permits; or to emit more than its permits, and buy permits from other participants. In effect, the buyer pays a charge for polluting, while the seller gains a reward for having reduced emissions.

Emissions Trading results in the incorporation of economic costs into the costs of production which incentivizes corporations to consider investment returns and capital expenditure decisions with a model that includes the price of carbon and  [[greenhouse gases]] (GHG).

In many schemes, organizations which do not pollute (and therefore have no obligations) may also trade permits and [[financial derivative]]s of permits.<ref name="parlinfo.aph.gov.au">[http://parlinfo.aph.gov.au/parlInfo/download/library/prspub/2501441/upload_binary/2501441.pdf "Emissions trading schemes around the world"] {{Webarchive|url=https://web.archive.org/web/20200110012804/https://parlinfo.aph.gov.au/parlInfo/download/library/prspub/2501441/upload_binary/2501441.pdf |archive-url=https://ghostarchive.org/archive/20221009/https://parlinfo.aph.gov.au/parlInfo/download/library/prspub/2501441/upload_binary/2501441.pdf |archive-date=2022-10-09 |url-status=live |date=2020-01-10 }}, Parliament of Australia, 2013.</ref>
In some schemes, participants can bank allowances to use in future periods.<ref>{{cite web|title=Cap and Trade 101|url=http://www.epa.gov/captrade/captrade-101.html|publisher=United States Environmental Protection Agency|access-date=27 October 2014|archive-date=5 August 2015|archive-url=https://web.archive.org/web/20150805145622/http://www.epa.gov/captrade/captrade-101.html|url-status=live}}</ref> In some schemes, a proportion of all traded permits must be retired periodically, causing a net reduction in emissions over time. Thus, [[environmental group]]s may buy and retire permits, driving up the price of the remaining permits according to the [[law of demand]].<ref>[[Arthur O'Sullivan (economist)|O'Sullivan, Arthur]], and [[Steven M. Sheffrin]]. ''Economics: Principles in Action''. Upper Saddle River, New Jersey, 2003. {{ISBN|0-13-063085-3}}</ref> In most schemes, permit owners can donate permits to a nonprofit entity and receive a [[tax deduction]]s. Usually, the government lowers the overall limit over time, with an aim towards a national emissions reduction target.<ref name="cap101" />

There are active trading programs in several [[air pollutant]]s. An earlier application was the US [[Acid Rain Program|national market]] to reduce [[acid rain]]. The United States now has several regional markets in [[NOx|nitrogen oxides]].<ref>{{cite web  | url = http://www.epa.gov/airmarkets/  | title = USEPA's Clean Air Markets web site  | publisher = US EPA  | access-date = 2009-11-03  | archive-date = 2010-07-24  | archive-url = https://web.archive.org/web/20100724044337/http://www.epa.gov/airmarkets/  | url-status = live  }}</ref>