See also:
Part 2 - How does New Zealand's 2008 ETS law work?
Part 3 - How is the National-Maori Party proposed ETS different, and what is wrong with it?
If dangerous climate change is to be limited to levels we can live with, there must be a significant reduction in emissions of carbon dioxide and other gases that warm the planet. (These include methane, nitrous oxide and some minor gases - generally expressed as carbon dioxide equivalent, or CO2-e.)
We can do that by changing day to day behaviour, and changing investment patterns. This can result in switching to more efficient technology to use energy; substituting renewable resources for fossil fuels; using cars less and buses and bikes more; purchasing much more fuel efficient vehicles; feeding farm animals differently and keeping them off wet pasture; planting more trees to absorb some of the carbon we emit.
But people generally don't make the effort unless there is an incentive. At present it doesn't cost anything to damage the climate with carbon emissions, even though climate change itself will be very costly to everyone. An ETS puts a price on emitting climate changing gases, which is taken into account in business and family decision making. The higher the price, the more effort people will make to reduce carbon emissions, and the more new technologies will become cost-effective.
Emissions Trading is sometimes called "cap-and-trade". Theoretically the total quantity of permitted emissions is set, and firms or individuals or countries are given a share of those rights. If they want more they must buy rights (called credits, or units) from others. If they can get by with less than their share, they have some to sell. This is the trading bit.
It is important to remember that it is not the trading that protects the climate, it is the cap on total emissions. Trading is just a way to ensure we do it in the most cost-efficient way possible. The Kyoto Protocol is also an emissions trading scheme between countries. The caps for each country are set by the targets agreed to in international negotiations. (NZ's target, or cap, for the first five years, 2008-12, is to return our emissions to 1990 levels. If we don't do that by 2012, we have to purchase emissions units from someone who has them to spare.)
Markets already exist internationally for the purchase and sale of carbon credits - each being the right to emit one tonne of carbon dioxide equivalent. Governments will use these markets to square up their carbon obligations after 2012, and they can also be used by firms who have a carbon limit imposed by their governments.
Theoretically, trading means that emissions will always be reduced in the most cost-effective way, and this lowers the cost to the whole society. If a firm can reduce their emissions more cheaply than the going price of carbon, they will do so and sell some units. Others who don't have cost-effective opportunities will buy them. If stronger action is needed to protect the climate, the cap can be reduced, the price to purchase units will go up and people will make
more effort.
Example: A factory needs to replace its boiler. Normally it would buy the cheapest one that would last, but that uses a lot of coal and produces a lot of emissions. With a price on carbon, the factory can choose to buy a "smart boiler" with electronic controls and be saved the cost of buying emission credits. Even better, they may invest in a boiler that uses waste wood chip from the forestry industry, and produces no carbon emissions. Then the factory has spare credits to sell.
But - just as you think you understand it, you find that's not quite how it works in NZ.
Part 2 - How does New Zealand's 2008 ETS law work?
Part 3 - How is the National-Maori Party proposed ETS different, and what is wrong with it?
