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Sectors and Gases

There are important differences across sectors and emissions sources that affect the extent to which specific sectors and emissions sources are worth covering. Whether it is beneficial to include a specific sector depends on the proportion of emissions it accounts for. In many industrialized countries, for instance, land use or waste account for only 5 to 10 percent of greenhouse gas (GHG) output, while power and industry account for 40 or 50 percent. While some sectors may seem to have more low-cost mitigation options than others, this is hard to predict. That difficulty is one of the major justifications for using carbon pricing: it unlocks private information and innovation. In the longer run, abatement options are even harder to predict, and all sources need to reduce emissions to achieve the global goal of zero net emissions. If short-term mitigation opportunities seem to be expensive and scarce, the sector may be targeted for research and development to unlock future abatement potential.

For an Emissions Trading System (ETS) to be effective, it must be possible to measure and monitor emissions with low uncertainties and at reasonable cost. Covering sectors dominated by a small number of large emitters can provide high benefits relative to administrative effort. The small number of large emitters can be included and thresholds used to exclude small, diffuse, or remote sources.

By contrast, covering sectors composed of many small, diffuse,or remote emissions sources may involve high administrative costs relative to benefits. The transport sector is a typical example—tracking the emissions from each vehicle and holding individual vehicle owners accountable is not feasible. Upstream regulation is thus often used for transport emissions, if policy makers decide to include it in an ETS at all.

The decision on which sectors to include is closely related to the question of which gases to include—considerations are broadly the same: increasing the scope increases the possibility for low-cost abatement and jurisdiction-wide environmental certainty.

Globally, carbon dioxide makes up by far the largest portion of GHGs and all ETSs include this gas. Many schemes include some other gases as well. As methane sometimes represents a significant portion of domestic emissions (for example, from landfills, fossil fuel extraction, and agriculture), coverage of these gases may be important to consider, especially in developing countries. If GHGs other than carbon dioxide are covered, their emissions need to be expressed as carbon dioxide equivalent (CO2e).

Sectors and Gases

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