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A signatory to the United Nations Framework Convention on Climate Change, the European Union is said to enjoy one of the most effective climate change mitigation instruments in the world. Its instrument for this purpose, which is known as its Emission Trading System (ETS), seeks to control greenhouse gas emissions by providing economic incentives for companies and individuals who reduce their emissions. The system's central philosophy revolves around a cap-and-trade market in which participants are required to hold permits that allow them to release a certain amount of greenhouse gases into the atmosphere. This has led to an increase in green technology investments, green innovation, low carbon business growth, green jobs creation and green revenue growth over recent years across Europe. However, the system still has its critics. While some recognize the need for climate change mitigation, others complain that it hinders economic growth by requiring companies to hold additional stocks of permits. This leads to an over-supply in the ETS causing prices to fall significantly below their marginal cost. The result is that emissions are displaced rather than reduced because businesses are able to trade emissions allowances at a lower price. This illustrates why emissions trading can be said to have a "trading" problem. While the ETS's central philosophy of regulating emissions through pricing has been widely acclaimed for being effective, it is precisely this aspect that helps to illustrate why emissions trading can be said to have a "trading" problem. The primary objective of the ETS is to reduce greenhouse gas emissions. The primary function of this reduction is for the EU's Climate Change Program with its Kyoto Protocol obligations, but also will contribute to meeting all other greenhouse gas emission reduction commitments made by the EU (and its Member States) under each treaty it has ratified. The intended environmental outcome is that emissions are reduced with accompanying reductions in global mean temperature and atmospheric levels of carbon dioxide (CO2). This is achieved by providing economic incentives for companies and individuals who reduce their emissions. If they do not, they must purchase allowances at the spot price or trade on the spot market to cover their emissions. The scheme also provides for setting an overall cap on greenhouse gas emissions so that total emissions are not exceeded. The ETS is not yet regarded as a global instrument, but has the potential to contribute to the success of an effective global climate policy. The EU's Climate Change Program requires all Member States to comply with the Kyoto Protocol target of reducing greenhouse gas emissions by 8% compared to 1990 levels. The EU has set itself a binding target of reducing its own emissions by at least 20% by 2020 compared to its emission levels in 1990. cfa1e77820
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