Emissions refer to pollution that is released into the air. An emissions trading system refers to a program that provides flexibility and accountability in instances where emissions limits have been set. This is done by issuing credits to polluters that can be traded between those who produce less pollution and those who produce more.
The Kyoto Protocol is an international agreement that many countries signed as part of an agreement to aim to reduce their greenhouse gas emissions. Those who signed this agreement are usually referred to as signatories. With the birth of this agreement came the birth of a concept known as an emissions trading system. The agreement was designed to manage emission levels by issuing assigned amount units (AAUs) to the signatories.
The AAUs determined how much pollution each signatory could emit. The emissions trading system was designed to allow countries to profit from using fewer AAUs than they were allotted. They could profit by selling their excess AAUs to those countries that needed more than they were allotted.
The emissions trading system was also designed to act as somewhat of a penalty system. If a country's emissions exceeded their AAUs, they would need to purchase credits. This could, therefore, be viewed as a surcharge for exceeding the given limit.
In many instances, the emissions trading system is referred to as the carbon market. This is because carbon dioxide is one of the gases that is most emitted and can be the most difficult to reduce. Therefore, the exchange of carbon dioxide credits has been prevalent.
Under the Kyoto Protocol, there are other types of units that are issued and which can be exchanged. For example, there is the certified emission reduction (CER) program. Credits can be gained through this program when a signatory develops an emission reduction project in a developing country. The credits that are earned can be sold or they can be used to augment the possessor's emission limits.
An emissions trading system is not always international. The European Union (EU) developed the European Union Greenhouse Gas Emission Trading System (EU ETS). This system was developed to allow trading between various sectors of the various EU member states.
The Kyoto Protocol also allows an emissions trading system to be developed at the national level. This can be achieved if a nation's AAUs are subdivided among the nation's major polluters. This will provide those parties with individual emission limits. In the event that an entity has excess AAUs, they can be sold to those national entities that have exceeded their limits, or they can be sold back to the national authorities.