Emissions Trading System (ETS)

What is the Emissions Trading System (ETS)?

Emission trading systems (ETS) or cap-and-trade systems, cap GHG emissions to achieve the climate goals of a particular jurisdiction. Carbon allowances equal to the emissions cap are then freely allocated or auctioned to emitting entities who may then trade these allowances between them with a price determined by supply and demand.

Allowance trading is a key benefit of ETS as it incentivizes least-cost abatement, as firms with a low abatement cost will abate and sell their allowances to firms with a higher abatement cost. An ETS also often allows firms to “bank” allowances and hold them for use in future compliance years.

Emitters with an insufficient number of allowances required for their industry at the end of the reporting period incur penalties.