The Trading of Carbon

Abstract

This chapter explores the concept of carbon pricing, with a specific focus on the trading of carbon via emissions trading systems (ETSs). The analysis starts with an overview of the main design options for a cap-and-trade system, presenting the experience of the European Union (EU) ETS as a real-world example of how such systems work. The history of the EU ETS is thoroughly examined, explaining what the main challenges and benefits of the system are, and what lessons can be learnt from the world’s biggest ETS. Using the European experience as a benchmark, other major ETS markets are also analysed, highlighting the potential for interconnection of different systems as well as the prospects for international cooperation mechanisms under Article 6 of the Paris Agreement.