An emissions trading scheme (ETS) is an economic policy instrument designed to limit greenhouse gas emissions by providing economic incentives to reduce such emissions. An ETS may also be referred to as a ‘cap and trade’ scheme. Cap and trade schemes may be national, such as the Australian and New Zealand schemes (the CPRS and NZ ETS respectively), or regional, such as the European Union emissions trading scheme (the EU ETS).

Under a cap and trade scheme, the Government sets a cap - or limit - on total emissions allowed within the market for that year, and issues a number of permits equal to the cap. For example, if the cap specified 50 million tonnes of carbon dioxide equivalent (see What is CO2-e?), 50 million permits would be issued. Entities that emit greenhouse gases above a certain threshold are then required to acquire a permit for every tonne of greenhouse gas that they emit. At the end of each commitment period, each liable entity would surrender a number of permits equal to the number of tonnes of emissions they produced in that year. Entities have the choice of either purchasing permits to meet their emissions liabilities, or reducing their emissions and selling the permits they hold — depending on the cost effectiveness for the particular entity.

Entities that choose to buy permits are, in effect, paying for the right to emit, and entities that sell permits are able to profit from reducing their emissions. This means that those entities that are able to reduce their emissions cheaply will do so, achieving a reduction in total emissions at the lowest possible cost. As the total cap of emissions is reduced each year so that, over time, less permits are available to trade, it is likely the price of permits will increase. This, in turn, will provide economic incentives for entities to reduce their emissions in order to avoid purchasing permits.

CO2-e is chemical 'shorthand' for carbon dioxide equivalent. Carbon dioxide equivalent is the standard measure used to enables comparison of different greenhouse gases and their respective global warming potentials (GWP) (see What is GWP?). It enables a country to tally the greenhouse emissions from all greenhouse gases into a single figure. For example, Australia's total greenhouse emissions in 2006 were 576 million tonnes of CO2-e.

Global warming potential (GWP) is a metric devised to enable the warming effects of different greenhouse gases to be compared. For example, the warming effect of 1 tonne of carbon dioxide (CO2) released into the atmosphere is designated (for the purposes of action under the Kyoto Protocol) as being 1, whereas the warming effect of an equivalent amount of methane (CH4) is 21 — meaning CH4 has a warming effect 21 times that of CO2. Other key greenhouse gases (and families of gases) targeted under the Kyoto Protocol are: nitrous oxide (N2O, GWP = 310), hydrofluorocarbons (HFCs, GWP = 1,300 to 11,700), perfluorocarbons (PFCs, GWP = 6,500 to 9,200) and sulphur hexafluoride (SF6, GWP = 23,900).

The Carbon Pollution Reduction Scheme (CPRS) is the Australian emissions trading scheme (see What is an ETS?), developed under the auspices of the Rudd Federal Government. The CPRS is the policy through which Australia will reduce greenhouse gas emissions and meet its obligations under the Kyoto Protocol, and is expected to come into effect in 2010.
www.climatechange.gov.au

The Garnaut Climate Change Review is an independent study commissioned by Australia's State and Territory Governments. The Review was established on 30 April 2007 and concluded on 30 September 2008. It examined the impacts of climate change on the Australian economy, the elements of an appropriate international policy response, and the challenges that face Australia in playing its proportionate part in that response. The Review's Final Report (www.garnautreview.org.au/index.htm) was released on 30 September 2008. Previous supplementary and technical reports (www.garnautreview.org.au/CA25734E0016A131/pages/all-reports--resources) were also published.
www.garnautreview.org.au

The Intergovernmental Panel on Climate Change (IPCC) is a scientific body established under the auspices of the World Meteorological Organisation (WMO) and by the United Nations Environment Programme (UNEP). The IPCC is open to all member countries of the WMO and UNEP. IPCC reports are researched and reviewed by large international teams of scientists.

The IPCC is mandated to provide international decision-makers with an objective source of information about climate change. The main activity of the IPCC is to publish Assessment Reports of the state of knowledge on climate change. The Fourth Assessment Report, Climate Change 2007 Report, was published in 2007 (www.ipcc.ch/ipccreports/assessments-reports.htm). It follows the First, Second and Third Assessment Reports (published in 1990, 1995, and 2001 respectively).

In 2007, the IPCC, together with former Vice-President of the United States Al Gore, were awarded the Nobel Peace Prize for their contribution to global awareness of, and knowledge about, climate change.
www.ipcc.ch

The Kyoto Protocol (http://unfccc.int/kyoto_protocol/items/2830.php) is an international agreement building upon the United Nations Framework Convention on Climate Change (UNFCCC) (see What is the UNFCCC?). The Kyoto Protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered into force on 16 February 2005. 183 Parties to the Convention have ratified the Protocol to date. While the UNFCCC encourages industrialised countries to stabilise greenhouse gas emissions, the Kyoto Protocol takes this a step further and actually commits them to do so by establishing legally binding targets for the reduction of specific greenhouse gases. The Kyoto Protocol greenhouse gases are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulphur hexafluoride (SF6).

The Kyoto Protocol places a heavier burden on developed countries than developing countries, based upon the principle of 'common but differentiated responsibilities'. The Kyoto Protocol sets binding targets for developed countries to reduce greenhouse gas emissions — averaging 5 per cent against 1990 levels over the five-year period 2008-2012 (known as the Kyoto commitment period). Australia ratified the Kyoto Protocol on 12 December 2007 (under the Rudd Federal Government, which was elected in November 2007), thus committing Australia to meeting its Kyoto target of reducing emissions to 108 per cent of 1990 levels between 2008-12.

With the first Kyoto commitment period due to end in 2012, international negotiations under the UNFCCC are underway to establish a new agreement to address climate change and global emissions. It is the intension that a successor agreement to the Kyoto Protocol will be reached during the UNFCCC conference in Copenhagen in December 2009 that is based on a binding global target for cutting emissions.
unfccc.int

The United Nations Framework Convention on Climate Change (UNFCCC) encourages industrialised countries to stabilise greenhouse gas emissions. The Convention entered into force on 21 March 1994, and 192 countries have now ratified the UNFCCC treaty.

The ultimate objective of the Climate Change Convention (UNFCCC) is to achieve ‘stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system’. The UNFCCC is a framework convention, meaning that it does not represent a final international agreement on climate change, but is rather a work in progress. The Kyoto Protocol was the first addition to the UNFCCC (see What is the Kyoto Protocol?).
www.unfccc.int