How does the EU's Emission Trading Scheme work?
The European Union’s Emission Trading Scheme (EU ETS) is designed to help reduce greenhouse gas emissions across the European Union. It works by setting a cap on the total greenhouse gas emissions from large emitters, such as power plants and factories. The EU ETS then issues emission allowance certificates to these large emitters. These certificates represent permission to emit a certain amount of greenhouse gases. The combined total of all the certificates distributed must remain within the mandated cap. If a large emitter wishes to emit more than its allocated allowance, it can purchase additional allowances from the market. Conversely, if the emitter wishes to emit less than its allocated allowance, it can sell its excess certificates on the market. This buying and selling of emission allowance certificates is regulated by the EU ETS, and the trade price of these certificates provides an incentive to reduce emissions, as it becomes more expensive to emit higher levels of greenhouse gases. The California state government has been a strong proponent of the EU ETS, recognizing its potential to reduce emissions from the state’s largest emitters. California has even gone so far as to propose its own emissions trading system based on the EU ETS, which would create a regional market for the trading of emission allowance certificates. This would further incentivize reductions in emissions and help California reach its ambitious emission reduction goals.
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