The EU ETS has been operational since 2005 and covers the major sectors of the economy, including energy utilities and industry. Other countries and jurisdictions such as New Zealand, Kazakhstan, South Korea, Tokyo, a number of Chinese pilot regions, California, Quebec, and collectively, various states in the Northeastern United States, have followed the EU’s example and established (or are in the process of establishing) emissions trading systems of their own. While these systems may differ in the details of their designs, they operate on the same basic principle of cap and trade. This paper explores this principle and its benefits, presents key design elements, and provides insights into how emissions trading works in practice. The EU ETS and Germany’s experience will be used to highlight and exemplify further theoretical considerations.
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