Introduction to Emissions Trading

Sources of air pollution that wish to reduce their emissions have many options available to them. These options include installing more advanced pollution control technology, switching to cleaner fuels, improving energy efficiency, and increasing renewable energy use. Sources that decrease their emissions by implementing such measures create emission reductions. Emission reductions from energy efficiency and renewable energy produce health and environmental benefits by reducing sulfur dioxide, carbon dioxide, nitrogen oxides, lead, mercury, and particulate matter emissions.

Emission trading occurs when a source of air pollution reduces its emissions and then transfers ownership of the emission reduction to another party. Markets for emission reductions can be created by regulation (the market for sulfur dioxide allowances for example) or voluntarily (the current market for greenhouse gases).

For more information on the U.S. market for sulfur dioxide (SO2) and allowance trading, click here.

Sources of air pollution that reduce their emissions may receive credit for their reductions. Emission reduction credits (ERCs) reward those who take action to reduce their pollutant emissions and therefore encourage pollution reduction actions. Credits for emission reductions provide an incentive to find the most cost-effective way to reduce emissions, since once an emission reduction credit is created, it can be sold on the open market.

A company can also offset its own emissions by causing a reduction or sequestration of emissions outside its operations. Offsets were originally designed to allow growth and development in areas that were not in compliance with an air quality standard without increasing pollution levels. An offset program allows emission trading between a new or modified source of air pollution and an existing source. Under this program, the new source is required to more than offset its emissions with reductions by the existing source. In this way, net emissions actually decrease.

Emission trading can be used to reduce pollution. Instead of reselling ERCs or allowances to sources of air pollution that will use them to compensate for their pollutant emissions, allowances can be retired without emitting any pollution. Once an allowance or ERC is retired, it can no longer be bought, sold, or used to offset pollution. Purchasing and retiring ERCs or allowances reduces the amount of pollution that is discharged to the atmosphere.

Consumers and businesses can take advantage of this concept and offset the emissions caused by their energy use by participating in emissions trading, i.e., buying and retiring ERCs. This amounts to paying someone else to reduce their emissions, with the agreement that the buyer will own the resulting emission reduction credits. In this way, we have a low cost way to compensate for the pollution that results from our energy use. Purchasing ERCs also strengthens the emission reduction market and gives companies and individuals an added incentive to reduce their pollution.

Offset your emissions through Cleaner and Greener^sm

To demonstrate the impact that we all can have on reducing pollution, Leonardo Academy has instituted the Cleaner and Greener^sm Green Energy program that lets consumers, businesses, and organizations offset their emissions by making a donation (all U.S. donations are tax-deductible) to buy and retire emission reduction credits. In this way, consumers everywhere can buy green energy through the Cleaner and Greener website.

For pollutants that have established national emission trading systems in place, the Cleaner and Greener^sm Program buys emission allowances and offsets from within that trading system. For example, sulfur dioxide allowance auctions are conducted by the Chicago Board of Trade. For pollutants like carbon dioxide, which do not have established emission trading systems, the Cleaner and Greener^sm Program buys emission reduction credits that are reported according to the Multiple Pollutant Emission Reduction Reporting System developed by Leonardo Academy with funding from the U.S. EPA. Any emission reduction credits or offsets that are purchased are retired. Once retired, they cannot be sold, traded, given away, or otherwise used to offset pollution.

The Cleaner and Greener Green Energy Program shows that there are low cost pollution reduction options available, encourages increased energy efficiency and renewable energy, and shows that there is public support for taking action to reduce pollution.

Return to the Emissions Trading Information Index

More Detailed ERC Information