Principles and Concept of Emissions Trading System (ETS)

What is ETS?

The climate change impacts that we are facing today arise due to the extreme emissions of greenhouse gases (GHGs) from human economic activities, including products manufacturing, services, agriculture, livestock, waste management , etc.GHGs are a “by-product” from these economy activities which means that are not taken into consideration by either the producers or consumers when making decisions. To address this issue, there are several approaches with the purpose of changing human behavior for reducing GHG emissions. GHG emissions mitigation mechanisms could be classified as follows;

1) Standards of operation: i.e., ISO 14064, ISO 14067, certification of carbon label;

2) Market Mechanism: i.e., Emissions Trading System (ETS), Carbon Credit Trading, Internal Carbon Pricing (ICP);

3) Clean Technology: i.e., advanced technology, alternative technology, energy conservation;

4) Fiscal Policy: i.e., Carbon Tax, tax deduction for GHG reduction projects;

5) Financial Policy: i.e., soft loan, grant;

6) Laws/Regulations: i.e., law for GHG emissions control, GHG reporting law, fine or fee.

Figure 1 shows GHG mitigation mechanisms developed by or participated in by TGO.

Currently, one of the most popular mitigation approaches is “Pricing mechanism for GHG mitigation” with the concept of “Putting the Price in Carbon”. Emissions Trading System or ETS is well-known as an effective tool to cope with GHG emissions.

Emissions Trading System or ETS is one of the market mechanisms whose operating process is started at “the scheme owner ( usually a government agency) who sets a cap or GHG emissions ceiling compared to the base yearfor each industry that has highGHG emissions”. Then the government will conduct a process of Allowance Allocation to factories/organizations in the system for limiting of GHG emissions ceiling/cap of eachfactory/organization that will not allowed to emit GHG exceeding their Cap determined each year. They have to report their GHG monitoring results, after passing a due verification process, to the government every year.

After that the factories/organizations shall “return the allowances, called Surrender” that are allocated from the government as their actual emissions (stated in the report at the end of year). In case the factories/organizations have emissions higher than that of their allocation, they have to buy allowances from others who are under the same system or buy carbon credits from GHG emissions reduction projects of other standards which the ETS system allows for offsetting. On the other hand, in case the factories/organizations have emissions lower than that of their allocation, they are able to collect (Banking) their allowances for the next year or sell to the other factories/organizations. Trading of allowances of the ETS system depends on demand and supply in the market of GHG emissions which in the past had no price but later a price was defined leading to a carbon market being set up as a mechanism for GHG reduction or so called “Carbon Market”.

Finally, the overall GHG reduction of the system will be achieved as per the set target while the factories/organizations will also receive financial incentive for GHG reduction by using cleaner technology. Moreover, ETS will be an incentivefor participants who have lower GHG reduction costs to increase their capacity in GHG reduction which will drive the country forward towards a “Low Carbon Economy” in the future.

ETS has several advantages including the reduction of GHG emissions with lowest costs and flexible mechanism, responding to economic fluctuation rather than other policies,reflecting the actual costs of GHG reduction, activating GHG reduction innovation (compared to carbon tax where the tax payer will operate only for tax avoidance), and helping business operation achieve GHG reduction target without excessive burden overload (due to flexibility in GHG reduction alternatives). However, ETS has some disadvantages which are high variation and unexpected price, and high administration costs of the government for additional regulatory institute.

International ETS

ETS Status

The Thailand Greenhouse Gas Management Organization (Public Organization) or TGO has collected information of carbon funds which investment in carbon credits from several data sources, such as the World Bank, Asian Development Bank (ADB), etc.

From the World Bank Report (World Bank, State and Trends of Carbon Pricing, 2019), found that 57 countries are applied or scheduled for implementing the Carbon Pricing mechanisms, i.e., Carbon Tax and ETS. These cover global GHG emissions of more than 11GtCO2e or approximately 15% of the global GHG emissions in 2019 and expect to reach 20% in 2020 (as shown in Figure 2 and Figure 3), and the trends of 2005 – 2015 increased 3 times considering GHG amount in the scheme boundary. Prices of carbon per tonne under the Emission trading mechanisms are in range of 2-25 US$ per tCO2e while carbon price in Tax scheme are in range of 1-70 US$ per tCO2e.

Figure 2 Overall international carbon pricing mechanisms implementation.

Figure 3 Greenhouse gas ratios under the carbon pricing mechanisms implementation For GHG reduction across the World.
(Source: State and Trends of Carbon Pricing, 2019)

Figure 4 Carbon prices per unit (US$ per tCO2e) of carbon pricing mechanisms around the world.
(Source: State and Trends of Carbon Pricing, 2019)

For more information on the ETS implementation of interesting countries, please visit and download documents at: https://icapcarbonaction.com/en/?option=com_attach&task=download&id=677