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Emission Trading

Under an emission trading system, a government sets a limit, or cap, on the total amount of emissions that can be released by a specific industry or sector. This cap is typically based on scientific assessments of the maximum allowable emissions to prevent dangerous levels of pollution.

Once the cap is established, the government issues a certain number of emission allowances, each representing the right to emit a specific amount of greenhouse gases. These allowances are distributed among the participating companies or entities within the regulated sector.

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Companies that emit fewer greenhouse gases than their allocated allowances can sell their surplus allowances to those that exceed their limits. This creates a market for emission allowances, where the price of allowances is determined by supply and demand dynamics.

The trading of emission allowances provides an economic incentive for companies to reduce their emissions. If a company invests in cleaner technologies or adopts more sustainable practices, it can reduce its emissions and sell its surplus allowances, generating additional revenue. On the other hand, companies that fail to meet their emission targets must purchase additional allowances to comply with the regulations, incurring financial costs.

Emission trading systems encourage companies to find the most cost-effective ways to reduce emissions, as they have the flexibility to choose between reducing emissions internally or purchasing allowances from other companies. This flexibility promotes innovation and efficiency in emission reduction efforts.

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Furthermore, emission trading can facilitate international cooperation in addressing climate change. It allows countries or regions with more stringent emission reduction targets to achieve their goals by purchasing allowances from countries or regions with surplus allowances. This promotes a more equitable distribution of emission reduction efforts and encourages global collaboration.

Overall, emission trading is a mechanism that harnesses market forces to incentivize emission reductions and promote sustainable development. By creating a financial value for reducing emissions, it encourages companies to adopt cleaner technologies, invest in renewable energy sources, and contribute to the global effort of mitigating climate change.

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Keywords: emission, allowances, emissions, trading, companies, market, reducing, greenhouse, sustainable