Carbon Trading

Steve Sorrell

This chapter discusses the role of carbon trading in climate policy, focusing in particular on Europe and the UK. It argues that carbon trading schemes are central to climate policy now and are likely to become increasingly important in the future. They have the potential to either drive effective climate policy or to wreck it. Without meaningful targets in trading schemes, the contribution of many other climate policy measures to emission reductions could be nullified.

The chapter begins by outlining some key tensions in the design of trading schemes, and argues that disputes over these issues form the core of contemporary debates. It then looks at the recent experience with the EU Emissions Trading Scheme (EU ETS), identifies its strengths and weaknesses and evaluates the changes proposed for the future. Next, it examines the impact of emissions trading schemes on industrial competitiveness and income distribution, and argues that neither should prevent the introduction of schemes with ambitious emission targets in the medium term. The future of emissions trading within the UK is discussed and an upstream trading scheme is proposed that could operate alongside the EU ETS and achieve a single price of carbon throughout the UK economy.

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