Carbon emission trading schemes (ETS) have been implemented all over the world as a means to limit the production of greenhouse gases (GHGs). There currently exists an extensive variety of these carbon trading schemes, each with their own strengths and weaknesses. ETS have been used for other air pollutants prior to their application to greenhouse gases. Emissions credit trading in the United States has existed since 1977. (Tietenburg et al. 1998, 6)
One of the world’s largest and most successful ETS, was established in 1990 under the Acid Rain program of the United States Clear Air Act amendments. (Tietenburg et al. 1998, 6) The Acid Rain program differed from its predecessors in that it was a cap-and-trade program and, as a result, yielded far more success.
The first Carbon ETS was implemented by the BP Corporation, which looked into the idea internally to reduce its own emissions and implemented it in 1998. (Betsill & Hoffman 2011, 90) The negotiations at Kyoto in 1997 also set the framework for an international ETS that was truly global in its scale, though it would not be implemented until 2008. After the Kyoto negotiations and the implementation of its own ETS, many other countries and private firms began to explore their own ETS. In 1998, Shell, Norway, Canada, New South Wales in Australia, and the United Kingdom all began initial discussions on implementing cap-and-trade GHG ETS. (Betsill & Hoffman 2011, 90)
As of 2009, thirteen ETS have reached the trading phase of their implementation. (Betsill & Hoffman 201, 93) They include the BP ETS (implemented 1998), Kyoto Protocol ETS (2008), Shell ETS (2002), United Kingdom ETS (2001), Norway ETS (2005), New South Wales ETS (2003), Denmark ETS (2000), European Union ETS (2005), Chicago Climate Exchange ETS (2003), Switzerland ETS (2008), Japan ETS (2005), Regional Greenhouse Gas Initiative ETS (2009), New Zealand ETS (2008). (Betsill & Hoffman 2011, 93)
There is also the Western Climate Initiative, which once promised to be the largest GHG ETS in the Western hemisphere. However, this ETS has faced significant political difficulties in meeting its deadlines since its inception in 2007. (Klinsky 2013, 145)
2. ETS Types:
Cap and Trade/Emissions allowance trading: this form of ETS is the current standard. Cap and trade schemes set a system-wide target and deals with most issues related to emissions baselines, allowable emissions, and credit allocation in the initial planning stages. This sets a system-wide cap of free and auctioned emissions credits before leaving the rest to market forces and implementing an emissions trading market that functions under the auspicious of the planned framework. A certain amount of ETS-wide emissions is allocated into emissions credits as a cap. These credits are then distributed freely to certain firms based on their historical emissions and economic position. The rest are auctioned off periodically. Once distributed, these credits may be freely...