Emissions Trading

Types of Emissions-Trading Policies

Emission trading involves trades of emission allowances or credits. In the credit trading program, to the extent that an entity's emissions are produced at a level below the amount permitted under the applicable emission standard, such an entity can apply for certification of the excess as an emission reduction credit (ERC). The entity is then allowed to trade its ERCs to another site whether under common ownership or not.

Allowance trading is a refinement of the credit trading program. Allowance trading measures emissions themselves rather than emissions over a period of time. Allowances are granted to an entity for a certain amount of emissions that entity is allowed to produce rather than focusing on just the incremental difference between the amount allowed by regulation and the amount produced. Allowance trading bears a relation to emission standards in that entities will only trade allowances to the extent that they hold allowances that enable them to produce emissions at a level that will result in compliance with the applicable emission standards. Conversely, credit trading depends on the level of the relevant emission standard to determine the amount of ERCs available to an entity at a particular time.

Trading of emission credits and allowances occurs in the context of differing policies allowing for the use of such credits. The policies are referred to as netting, offset, banking, and bubble policies, and the specific policy applied depends, in part, on whether the emission source is new or existing and on whether the currency being traded is credits or allowances. Credit trading uses the bubble and offset policies, while allowance trading uses the netting and banking policies.

The offset policy permits the creation of new emission sources in areas that have not attained good air or water quality by requiring such sources to result in emissions that are at least 20% lower than would otherwise be required for a new source in an area that has attained good air or water quality. The bubble policy involves aggregating multiple emission points and regulating the level of emissions within the bubble through the use of standards and credit trading.

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