Emissions trading system

A market-based instrument in which a government sets a cap on total emissions (some systems instead regulate emissions intensity per unit of output) from covered installations, issues or auctions a matching quantity of allowances, and permits participants to trade them. The cap determines the environmental outcome; trading determines who reduces emissions and at what cost. The resulting carbon price emerges from the market rather than being set administratively, which is the main structural difference from a carbon tax.

Why it matters in the room

An operating ETS is directly observable evidence of an explicit carbon price. That matters for Article 6 cooperation, for any discussion of linking systems, and for border measures that recognise carbon prices already paid.