Climate change policy - carbon trading

How does carbon trading work?

Carbon trading works by setting an upper limit on carbon emissions across the whole economy.

All companies are given an emissions allowance - a fixed amount that they are allowed to emit. If a company's emissions exceed their allowance, they have three options:

• cut their emissions by, for example, investing in low emissions technology,
• purchase additional allowance from companies who have not used their own since they have not exceeded their allowance, or
• a combination of the above.

Whichever option companies choose, the level of carbon emissions across the whole economy is regulated within a set limit.

Carbon trading versus Green taxes:

Green taxes such as the UK’s Air Passenger Duty are often talked about as a method of reducing carbon emissions. They work by adding a tax onto the price of goods and services which is deemed relative to its environmental impact.

Research has illustrated green taxes have little effect when compared to carbon trading. In order to achieve the same emissions reduction as trading, tax would need to be at least 23 times more costly than trading.

Green taxes are therefore ineffective in tackling climate change as the added cost of tax could be invested in finding alternate ways to reduce emissions such as developing new low carbon technologies.

Active lobbying for a global climate policy

We are actively leading the development of a global agreement in aviation climate policy. We are doing this both within the industry, for example through the International Air Transport Association and as a leading member of the UK Sustainable Aviation Group, and in broader global forums such as the World Economic Forum and the Gleneagles Climate Change Dialogue.