A market-based instrument aiming at meeting a mitigation objective in an efficient way. A cap on GHG emissions is divided in tradeable emission permits that are allocated by a combination of auctioning and handing out free allowances to entities within the jurisdiction of the trading scheme. Entities need to surrender emission permits equal to the amount of their emissions (e.g., tonnes of CO2). An entity may sell excess permits to entities that can avoid the same amount of emissions in a cheaper way. Trading schemes may occur at the intra-company, domestic, or international level (e.g., the flexibility mechanisms under the Kyoto Protocol and the EU-ETS) and may apply to carbon dioxide (CO2), other greenhouse gases (GHGs), or other substances.
EMISSIONS TRADING
