How do companies benefit from emissions trading?
Let’s say that companies A and B both emit 100,000 tonnes of CO2 per year. The government gives each of them 95,000 emission allowances. One allowance represents the right to emit one tonne of CO2. So, neither company is fully covered for its emissions. At the end of each year, the companies have to surrender a number of allowances corresponding to their actual emissions during the year. Companies A and B both have to cover 5,000 tonnes of CO2, and they have two ways of doing this. They can either reduce their emissions by 5,000 tonnes, or purchase 5,000 allowances in the market. In order to decide which option to pursue, they will compare the costs of reducing their emissions by 5,000 tonnes with the market price for allowances.
