Emissions Trading

This encyclopedia entry summarizes the theory and practice of emissions trading as a market-based instrument to achieve an environmental target in a cost-effective way by allowing legal entities to buy and sell emission rights. In theory, there are three basic design variants of emissions trading: cap-and-trade (allowance trading), performance standard rate trading (credit trading), and project-based credit trading (such as domestic offsets, JI, CDM and SDM projects). In practice, emissions trading systems (ETS) can be hybrids of those design variants, such as the EU ETS. The limited but increasing use of emissions trading and the first ETS linkages created within continents underlines the growing legal relevance of this economic instrument