Emissions markets and products

This chapter gives an overview of the science behind climate change and provides some numbers on the social costs created by excessive greenhouse gases (GHGs) emissions. The emergence of cap-and-trade solutions as an efficient mechanism to internalize the cost of carbon pollution is also described. The chapter provides a detailed overview of the genesis and deployment of international regulations designed to internalize the emission constraints. It describes the difficulty in choosing an appropriate strategy between command-and-control measures, taxes and markets for emissions. A particular emphasis is placed on the most successful scheme already implemented, the European Union Emissions Trading Scheme (EU ETS), with a look at its possible future. The chapter introduces the importance of the substitution principle between emission permits and abatement technology, a principle which may create partial price correlation between emissions, coal and gas (fuel switch).