The aim of emission trading is to achieve emissions reductions at the lowest economic cost. Emission trading occurs when a factory reduces its emissions and environmental impact and then transfers ownership of the emission reduction to another party. Emission allowances are typically given by regulators to large sources of pollution, and allow those sources to release a prescribed amount of a pollutant. Surplus allowances can be sold, traded, or banked for future use.
As an instrument for reducing carbon dioxide emissions, the European Union Emission Trading Scheme (EU ETS) became effective in January 2005. It was developed not only to support the reduction of CO 2 emissions, but also to offer companies an incentive for developing and using new technologies. Under the ETS, the EU imposes CO2 quotas on more than 15 000 company-owned power plants and factories. Businesses that exceed their limits must either buy allowances from companies that emit less, or pay a penalty.
