The Emissions Trading Scheme

The ETS is a market-based approach used to control and ultimately reduce pollution emissions. The government sets a limit on the overall amount of pollutants to be emitted by firms. Each firm is allocated a cap which is sold to them in the form of an emissions permit (the right to emit a specific volume of pollutant). The total amount of permits sold cannot exceed the limit. Firms that need to increase their emission permits must buy permits from those firms who require fewer permits. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced their emissions.