Tradable Pollution Permits (ETS)

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What are tradable pollution permits?

Tradable pollution permits is a system created to encourage firms to reduce their overall pollution levels. It is a cap and trade system allowing firms to sell any unused permits and buy extra permits from other firms or governments.

ETS – Emissions Trading System

In 2005 the European Commission set up the Emissions trading system (ETS) in an attempt to limit greenhouse gasses from large industries. The main focus of the ETS was to lower CO2 emissions from Europe’s largest polluters e.g. Energy providers.

How does ETS work?

• The ETS is known as a cap and trade system. 
• Each year the European Commission allocates a set amount of carbon dioxide permits to national governments. 
• The government of each country will then decide how much of the allocation provided by the ETS for their country should be given to each company in their country. 
• This helps to cap the total amount of pollution generated by those companies who are involved in the scheme.
• It’s important to note that the permits are tradable. This means that it provides an incentive for firms to pollute less and sell their permits on to other firms for a profit. 
• If a firm requires more permits than it is allowed to use. They will have to buy the extra permits from another company or the government at an additional cost.  
• This encourages firms to reduce their pollution and invest in cleaner production methods.

Advantages of tradable pollution permits

1. Overtime carbon emissions can be cut by continuously reducing the number of permits provided to governments and firms.
2. Governments will be able to make more money through the sale of extra permits to firms who have exceeded their permit allocations. These funds can then be used to invest in environmentally friendly activities. 
3. Firms have an incentive to invest in clean technology.
4. Extra income gained by those firms who are more environmentally friendly. This also gives them a competitive advantage over other firms.

Disadvantages of tradable pollution permits

1. The ETS may release too many carbon emissions. This will not help to reduce pollution levels.
2. The ETS or governments may provide too little carbon emissions to firms making them uncompetitive due to a significant increase in their cost of production.
3. The higher cost of production due to the purchasing of more permits could be passed on to consumers as higher prices.
4. The price of purchasing extra permits may not be a significantly large cost for big firms. Therefore, they may continue to pollute at high levels by purchasing more permits.