WHICH SECTORS IN THE UK USE TRADE POLLUTION

PERMITS?
Tradable pollution permits:
- Tradable permits are a market-based solution to emission control and reduction
- The carbon permits market works on a cap-and-trade principle, where the government
or its appointed agencies set targets for allowable pollution within an industry, and
then issue permits to individual firms.
- If producers pollute within the agreed allowance, then they won't require further
permits
- However, should they pollute more than allowable, they must either reduce their
pollution levels, or purchase additional permits.
- The most polluting firms will enter the emissions trading market as buyers, and those
firms that pollute below their allowed level can sell their surplus permits.
- When a permit is purchased, it adds to the firm's costs, just like any other production
cost.
- This, then, forces the polluter to ‘internalise’ the externality.
- Hence, the effect of higher pollution levels is to increase costs, which can be shown
with a standard cost and revenue diagram.
- The effect of the carbon permit is to increase variable costs.
The European emissions trading system:
- The EU-ETS is the largest example of emissions trading, and involves around 12,000
plants, across 30 countries and covers some 40% of EU emissions from 4 main
sectors: electricity generation, Iron and steel, mineral processing, such as cement
manufacture, and pulp and paper processing.
- Typically, of the annual emission allowances issued, the largest portion are provided
freely, with around 15 to 20% of the allowance sold off at auction.
- The quantity of free allowances decreases each year to provide an incentive to firms
to cut their emissions.
- he system of carbon permits puts a price on carbon emissions for those firms that are
regulated.
- The pioneering work of the ETS led the way for other countries to introduce their own
systems, including Canada, Japan, New Zealand, South Korea, Switzerland and the
United States.