Why Emissions Trading?

An emission trading system (ETS) is a powerful policy instrument for managing greenhouse gas (GHG) emissions. Cap and trade encourages operational excellence and provides an incentive and path for the deployment of new and existing technologies.

As a policy instrument, emissions trading is preferable to taxes, inflexible command-and-control regulation, and taxpayer-funded support programmes because:

    • It is the most economically efficient means of reaching a given emissions reduction cap or target
    • It is specifically designed to deliver the environmental objective
    • It delivers a clear price signal against which to measure  abatement investments

Trading is not the only policy instrument that governments should use – but failing to give a major role to trading will impose unnecessary costs and create policy confusion.

Trading responds to the central objective of climate change policy of efficiently directing capital within markets towards low-to-zero carbon emissions investments. To achieve this aim, an emissions market requires:


    • Scarcity of emission allowances in order to create the price signals for low-carbon investments
    • Long-term clarity and predictability of rules, targets and the regulatory systems guiding emissions markets worldwide
    • Adequate compliance periods, allowing companies to structure a “make or buy” approach to their emissions reductions over time
    • Cost containment provisions, allowing efficiency in discovering of lowest-cost solutions wherever they are to be found Offset-based mechanisms offer the opportunity for countries or sectors that have yet to introduce an allowance-based approach to participate in the market


The emissions markets should mature and grow, to evolve and provide wide GHG coverage:

    • sector-by-sector
    • geography-by-geography

 This will lead to a global price for carbon and a trading system as exists in currency, commodity and debt markets. Ensuring that carbon has the proper links in all of these markets will require:

    • Harmonised benchmarks, ambitions, rules, monitoring and enforcement within an array of approaches
    • Structures and regulations to link different approaches and systems, directly or by exchange rates or market instruments
    • Worldwide offset mechanisms based on verifiable emission reduction projects and standards


Carbon pricing opens the door to a new set of investment and financing opportunities.  These opportunities can link the metrics and methods for GHG abatement with larger capital markets flows aimed at financing low-to-zero carbon investments all over the world.