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Emissions trading



Emissions trading or cap and trade (""cap"" meaning a legal limit on the quantity of a certain type of chemical an economy can emit each year) is a market-based approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. Various countries, groups of companies, and states have adopted emission trading systems as one of the strategies for mitigating climate-change by addressing international greenhouse-gas emission.A central authority (usually a governmental body) sets a limit or cap on the amount of a pollutant that may be emitted. The limit or cap is allocated and/or sold by the central authority to firms in the form of emissions permits which represent the right to emit or discharge a specific volume of the specified pollutant. Permits (and possibly also derivatives of permits) can then be traded on secondary markets. For example, the EU ETS trades primarily in European Union Allowances (EUAs), the Californian scheme in California Carbon Allowances, the New Zealand scheme in New Zealand Units and the Australian scheme in Australian Units. Firms are required to hold a number of permits (or allowances or carbon credits) equivalent to their emissions. The total number of permits cannot exceed the cap, limiting total emissions to that level. Firms that need to increase their volume of emissions must buy permits from those who require fewer permits.The transfer of permits is referred to as a ""trade"". In effect, the buyer is paying a charge for polluting, while the seller gains a reward for having reduced emissions. Thus, in theory, those who can reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest cost to society.There are active trading programs in several air pollutants. For greenhouse gases the largest is the European Union Emission Trading Scheme, whose purpose is to avoid dangerous climate change. Cap and trade provides the private sector with the flexibility required to reduce emissions while stimulating technological innovation and economic growth. The United States has a national market to reduce acid rain and several regional markets in nitrogen oxides.
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