Essential Knowledge for Responding to Climate Change: What is the Greenhouse Gas Emission Trading Scheme?

Today, we're going to explore the Greenhouse Gas Emission Trading Scheme, which plays a crucial role in addressing climate change. Many of you may have heard of this term, but we'll delve into the specifics of what it is and how it impacts our lives.

The Relationship Between Climate Change and Greenhouse Gas Emissions

Before examining the Greenhouse Gas Emission Trading Scheme, it's essential to understand the relationship between climate change and greenhouse gas emissions.

Climate change is a phenomenon characterized by a long-term increase in the Earth's average temperature.

Also known as global warming, it results from various factors. Among them, the most significant cause is Greenhouse gas emissions from human activities.

Greenhouse gases exist in the atmosphere and play a role in maintaining a stable Earth temperature. However, due to increased greenhouse gas concentrations caused by human activities, the Earth's temperature has risen excessively, leading to climate change.

• Major greenhouse gases include carbon dioxide (CO₂), methane (CH₄), and nitrous oxide (N₂O).

Since the Industrial Revolution, population growth and industrial development have led to a dramatic increase in greenhouse gas emissions. This has resulted in a continuous rise in global temperatures, accelerating climate change. Climate change significantly impacts the Earth's ecosystem and threatens human survival, prompting the international community to undertake various efforts to reduce greenhouse gas emissions.

Basic Principles of the Greenhouse Gas Emission Trading Scheme

The Greenhouse Gas Emission Trading Scheme is a system that utilizes market mechanisms to effectively reduce greenhouse gas emissions.

The basic principles are as follows:

Greenhouse gas emission allowances are set for countries or companies. Each entity receives an allocation of greenhouse gases it can emit. If an entity wants to emit more than its allocated amount, it must purchase emission allowances from another entity. Conversely, if an entity emits less than its allocated amount, it can sell the remaining emission allowances to other entities.

This strengthens accountability for greenhouse gas emissions and encourages voluntary reductions. Furthermore, the trading process establishes a price for emissions, enabling market participants to make decisions regarding greenhouse gas reduction based on price fluctuations. In other words, they can make informed decisions considering the costs and benefits of reducing greenhouse gases.

The emission trading scheme is already implemented in many countries, and governments set national greenhouse gas reduction targets annually and operate the emission trading scheme to achieve these goals.

Global Status of Greenhouse Gas Emission Trading Scheme Adoption

The Greenhouse Gas Emission Trading Scheme is being adopted globally as part of international efforts to address climate change. As of 2023, over 60 countries have implemented or plan to implement a national emission trading scheme, and over 10 regions, including the European Union (EU) and the US state of California, have implemented it at the regional level.

The European Union (EU)has been implementing an emission trading scheme for its member states since 2005, making it the largest and longest-standing emission trading scheme in the world. The EU has set a target of reducing greenhouse gas emissions by 40% compared to 1990 levels by 2020 through its emission trading scheme. Subsequently, it is pushing for an amended version to achieve a 55% reduction by 2030.

The United Statesoperates emission trading schemes at the state level. Notably, California introduced the first emission trading scheme in the US in 2006. Other states, including New York, New Jersey, and Massachusetts, have implemented emission trading schemes, and the federal government is also considering adopting one.

Chinahas been implementing a nationwide emission trading scheme since 2017. Seven regions, including Beijing, Shanghai, and Shenzhen, have been implementing regional emission trading schemes since 2013 after pilot programs.

Japanhas been implementing emission trading schemes in some regions, such as Tokyo and Osaka, since 2013. It is scheduled to implement a nationwide emission trading scheme starting in 2023.

Economic Impact of the Greenhouse Gas Emission Trading Scheme

The Emission Trading Scheme is a system that imposes greenhouse gas reduction obligations on businesses while offering economic incentives to encourage voluntary participation.

• Businesses can reduce costs by purchasing emission allowances or selling surplus allowances, which can enhance their competitiveness.
• The development of financial markets due to fluctuations in allowance prices is also anticipated. The activation of the emission allowance trading market increases the likelihood of the emergence of derivative products such as emission allowance futures and options. This would contribute to the development of the financial industry.

However, there are also negative impacts.

• Rising allowance prices can increase production costs for businesses, potentially leading to inflation.
• Issues such as speculative trading due to under-allocation or regulatory failure can arise.

Therefore, sophisticated policy design by the government is necessary to minimize these impacts. By exploring methods to alleviate the burden on businesses through appropriate allocation of allowances and market stabilization measures, while simultaneously achieving greenhouse gas reduction goals, we can strive for a sustainable future.

Impact of the Greenhouse Gas Emission Trading Scheme on Businesses

The Greenhouse Gas Emission Trading Scheme is a system that restricts the amount of greenhouse gases a company can emit and allows for the trading of emission allowances.

This can significantly impact business management strategies.

• The Greenhouse Gas Emission Trading Scheme can increase business costs. This is because companies need to purchase emission allowances or make additional investments in facilities to reduce emissions. This can negatively impact profitability, so businesses need to prepare adequately for the emission trading scheme.
• It can also serve as an opportunity. By reducing emissions, businesses can proactively address environmental regulations, enhance their image, and gain customer trust. Additionally, they can generate new revenue through emission allowance trading.

Especially in countries with a high proportion of export-oriented manufacturing industries, efforts such as developing greenhouse gas reduction technologies and establishing emission allowance trading strategies are necessary to secure international competitiveness.

Advantages and Disadvantages of the Greenhouse Gas Emission Trading Scheme

The advantages of the emission trading scheme are as follows:

• It allows for cost-effective greenhouse gas emission reductions through market mechanisms. In other words, individual companies can purchase emission allowances instead of directly reducing emissions, offering a more cost-efficient approach.
• It offers greater flexibility than direct regulation. It can adapt to unexpected situations like economic fluctuations, new or expanded production facilities, and so on.
• It allows for effective achievement of national greenhouse gas emission reduction targets through linkages with the international carbon market. The European Union (EU), the United States, China, Japan, and many other countries have implemented or are planning to implement emission trading schemes. By connecting these international carbon markets, we can contribute to global greenhouse gas emission reductions.

The disadvantages include

• The volatility of allowance prices creates uncertainty. This can increase business risk.
• It can lead to moral hazard in some companies. Loopholes in regulations can lead to illegal emission activities or manipulation of emission measurement methods.

Successful Examples of Greenhouse Gas Emission Trading Scheme Operation

Several countries have reported successful cases of operating the emission trading scheme. Among them, a prime example is the European Union Emissions Trading System (EU ETS).

The European Union has been implementing an emission trading scheme for over 15,000 companies within the region since 2005. Since its introduction, greenhouse gas emissions within the European Union have steadily decreased. Notably, despite the economic downturn caused by the COVID-19 pandemic, emissions in 2020 decreased by 7% compared to the previous year.

These achievements can be attributed to the European Union's proactive pursuit of various climate change mitigation policies, including the emission trading scheme.

Let's all work towards environmental protection to build a better future!