Why is carbon trading said to cut emissions at the lowest overall cost?

Firms with the cheapest abatement options make the largest cuts and sell their allowances. The total cut set by the cap is therefore achieved wherever it is cheapest.

When was the EU Emissions Trading System launched, and which sectors does it cover?

The EU Emissions Trading System began in 2005 as the world's first major carbon market. The EU scheme covers power stations, heavy industry, flights within Europe and, since 2024, maritime shipping.

What replaced the EU Emissions Trading System for UK firms after Brexit?

The UK Emissions Trading Scheme replaced the EU system for UK firms on 1 January 2021, although Northern Ireland's electricity generators stayed in the EU system under the Windsor Framework. The UK scheme works on the same cap-and-trade principle.

CCEA A-Level Environmental Technology 3930

Fossil Fuels

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Global Action on Energy Conservation and Climate Change

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Macrogeneration

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Fossil Fuels

Carbon trading schemes

3 things to know
AS 1

Overview

Cap and trade, why trading finds the cheapest cuts, the EU Emissions Trading System and the UK scheme after Brexit, allowance calculations, the early price collapse, offsetting, carbon leakage and carbon taxes.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

Explain the concept of carbon trading.

Key term

Why is carbon trading often called cap and trade?

Key term

How does carbon trading give firms an incentive to cut emissions?

Questions from this subtopic

Each one with the model answer underneath.

1
Explain the concept of carbon trading.
Model answer
Carbon trading puts a cap on total emissions and divides it into allowances, each permitting one tonne of carbon dioxide equivalent. Firms that emit less than their allowance can sell the surplus to firms that emit more.
2
Why is carbon trading often called cap and trade?
Model answer
A regulator caps the total emissions allowed across all covered firms. The allowances within that cap are then traded between firms.
3
How does carbon trading give firms an incentive to cut emissions?
Model answer
Every tonne a firm emits costs it an allowance that could otherwise be sold. Firms that can cut emissions cheaply profit by doing so and selling the spare allowances.
4
Why is carbon trading said to cut emissions at the lowest overall cost?
Model answer
Firms with the cheapest abatement options make the largest cuts and sell their allowances. The total cut set by the cap is therefore achieved wherever it is cheapest.
5
When was the EU Emissions Trading System launched, and which sectors does it cover?
Model answer
The EU Emissions Trading System began in 2005 as the world's first major carbon market. The EU scheme covers power stations, heavy industry, flights within Europe and, since 2024, maritime shipping.
6
What replaced the EU Emissions Trading System for UK firms after Brexit?
Model answer
The UK Emissions Trading Scheme replaced the EU system for UK firms on 1 January 2021, although Northern Ireland's electricity generators stayed in the EU system under the Windsor Framework. The UK scheme works on the same cap-and-trade principle.

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Fossil Fuels

Global Action on Energy Conservation and Climate Change

Macrogeneration

Microgeneration

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