How does emissions trading work?

Last Updated : June 01 2017

How does emissions trading work?

by Chloe Johnson 2017 May 25

How does emissions trading work?

Before going into a detailed discussion of what is the carbon tax, we must first understand why this particular pricing scheme was implemented and what its purpose is to everyone involved. You may have heard of the Kyoto Protocol, an international agreement ratified by many first-world countries and several developing nations in the 1990s as part of a global initiative to reduce number of greenhouse gases in the atmosphere and to gradually lessen the world's carbon emissions. Australia's current carbon pricing scheme is another attempt at reducing the nation's carbon level index (CLI), which leads us to the study of the trading mechanisms for the buying and selling of carbon credits. According to Tim Wilson, director of climate change policy at the Institute of Public Affairs in Australia, PM Gillard's government has implemented, by far, the "largest and most broadly applied carbon tax" in the world.

The Carbon Trading Schemes: Deeply Flawed and Heavily Exploited

Carbon became such a hot commodity in Europe since the Union implemented its trading system for carbon credits among it's developing and non-developing member nations. After more than four years, economists, legislators, and hard-line critics of the carbon trade discovered it's a deeply flawed system. Unscrupulous firms took advantage of the trading scheme's weaknesses to make a killing in the market while they continued to charge their consumers expensive prices for the goods and services they delivered. Sadly, profits made from trading carbon credits were often left out in the books.

The original motivations for awarding carbon credits to businesses with lower CLI included naïve assumptions about the goodness inherent in all human beings and how strongly this factor influences an individual or an organization to walk down the path of greed and selfishness. For instance, power firms who truly appreciated the opportunity to recover whatever investments they've poured into clean energy ventures would've also made efforts to pass on the torch of goodwill to end-users and business associates through discounted rates and offers of financial incentives to those who've also reduced their energy consumption (and their personal carbon footprint, too). Contrary to expectations, the reward system for companies with reduced emissions backfired because heavy emitters always had the option to buy more credits that would allow them to release more noxious fumes and pollutants into the air.

Is the Carbon Tax Similar to an Emissions Trading Scheme or ETS?

According to an SBS Australia article by Chiara Pazzano, imposing a $23 tax per megatonne of emissions isn't similar to capping the carbon levels for each firm. Within an ETS framework, the government issues an exact number of permits, which must be distributed equally to heavy emitters. Companies with low indices don't need to pay for these permits, but instead receive credits, which they can sell to firms who've gone over their carbon limits.

In contrast, the carbon-based levy puts a heavy financial load on companies who continue to pollute the atmosphere. The only way for them to avoid paying this tax burden is to reduce their carbon emissions. In effect, the tax policy works as a negative stimulus towards changing the attitudes and mindset of people for the better good. Considering that these people are amongst the most influential in the business sector, specifically in Australia's major industries, there's a strong likelihood that they'll also persuade their employees, business associates, and customers into following their lead.

Chloe Johnson
#1 Chloe JohnsonAuthor 18 March, 2014, 12:37 Chloe Johnson is a happily married mother of 2. She loves spending time with her kids and her husband. She loves dogs and enjoys travelling in any places.