How trading schemes can be used to achieve environmental objectives.
Trading can provide a least-cost solution to achieving environmental objectives because participants have the flexibility to make improvements when and where they decide.
Schemes which allow trading of emissions, waste or resources can deliver environmental objectives at lower cost than alternative approaches such as traditional permit-based regulation. Trading can be applied to a variety of issues, from individual pollutants such as nitrogen oxides, to the use of resources such as water, or to address waste management. In the UK we already have a trading scheme for greenhouse gas emissions and there are plans for trading biodegradable municipal waste, oxides of nitrogen (NOx) and sulphur dioxide from power stations, and water abstraction rights.
Trading schemes need to be carefully tailored to suit the particular environmental objectives and circumstances. They will usually need to be supported by a permit scheme to ensure protection of the local environment.
There are different designs, but typically a scheme might consist of the following elements:
- a binding target such as a cap on total emissions or resources
- a clear unit of trade eg 1 tonne of NOx, 1 tonne of waste
- a system for distributing initial allowances to participants in the scheme
- a penalty system for non-compliance
- a specific compliance period, for example a year.
At the end of the compliance period, participants must hold sufficient allowances to cover their emissions or resources used within the period, or a non-compliance penalty will be invoked. Participants covered by the scheme can choose either to operate within their allowance by reducing emissions (or resource use), to buy extra allowances in the market to cover any excess above their initial allowance, or to sell surplus allowances if they perform better than their initial allocation. They therefore have greater flexibility to choose which is the most cost-effective option.
Such a scheme achieves the environmental objective because collectively the participants must meet the overall cap, which is the sum of the initial allocations. The cap can be reduced from year to year to achieve a progressive reduction.
The Environment Agency's role in trading schemes may be to advise government on the scheme design, to be responsible for some or all of the operational aspects such as assessing compliance, or we could be the lead organisation responsible for the effective operation of the scheme.
For further information on Trading schemes, visit our pages on Delivering for the environment.