Carbon Emission Trading is a very interesting scheme that achieves regulation purposes with a free-market mechanism.
No matter what a company is producing, it needs to consume energy to build it. Usually, it uses energy from fossil fuels, and thus produces a lot of carbon dioxide emissions.
A global consensus has been reached that carbon emission will drive climate change. To control how much carbon is produced each year, governments all over the world have decided to set a cap on how much carbon the world can produce in one year, and every company will get a certain number of allowances to produce carbon. Each allowance allows a company to produce one ton of CO2.
If my company gets 100 allowances, but only produce 70 ton of CO2, then I can sell 30 allowances to your company, if you want to expand your business.
If the regulators want less CO2 for next year, they can simply issue fewer allowances for next year. This is called a cap-and-trade scheme.
Now business needs to pay for the carbon emission, that will force them to reduce carbon emission by using more efficient equipment. Or cut old production lines.
They will also be more willing to deploy sustainable energy systems, such as solar and wind.
The cap-and-trade scheme is also very flexible. If a company can not switch to higher-end equipment or sustainable energy system, they can buy the allowance from other companies. This way they don’t need to be shut down and cause a lot of unemployment in short term.
Carbon Emission Trading is a very interesting topic. Cause what has a hard cap has a great value. For thousands of years, because human beings rely on farming to survive, land has been considered very precious, because it is capped by nature. But now we are in an industrial age, one tiny piece of land can produce lots of products, and the world population is likely to decrease, so land is not a limiting factor anymore. In China, high house price has caused serious problems, so the state already decided not to get the governments financed by selling land. So maybe selling carbon emission allowances will be a better way.