Emissions trading systems (ETSs) as a cost-effective instrument for emissions control in the power sector are now being implemented or considered across a diverse set of jurisdictions. However, regulation in the power sector may impede or alter the functioning of an ETS.
An emissions trading system (ETS) is a market-based mechanism that is applied to achieve emissions targets at least cost. By fixing a quantity of emissions (the cap), requiring that companies surrender one allowance for each unit of emissions generated and making the allowance tradable, a carbon market is created through which an allowance price emerges. For producers, the allowance price is treated as a marginal cost in operation decisions and is a commodity that needs to be reflected in investment appraisals.