Cap-and-trade systems

Definition

Cap-and-trade systems are market-based approaches used to control pollution by providing economic incentives for reducing emissions. These systems set a cap on the total level of greenhouse gas emissions allowed and distribute permits to emit a certain amount, which can be traded among companies. This flexibility encourages innovation and cost-effective reductions in emissions, aligning economic activity with environmental sustainability.

5 Must Know Facts For Your Next Test

1. Cap-and-trade systems have been implemented in various regions, including the European Union's Emissions Trading System (EU ETS) and California's cap-and-trade program.
2. The total emissions cap is typically lowered over time, promoting ongoing reductions in greenhouse gas emissions as companies adapt and innovate.
3. Companies that can reduce emissions at lower costs can sell their excess allowances to those facing higher costs, creating a flexible and efficient market for emissions reductions.
4. Cap-and-trade systems often include mechanisms for monitoring and reporting emissions to ensure compliance and transparency.
5. Critics argue that cap-and-trade systems can lead to unequal impacts on different industries and communities, potentially allowing some companies to 'buy their way out' of making meaningful changes.

Review Questions

• How do cap-and-trade systems incentivize companies to reduce their greenhouse gas emissions?
  • Cap-and-trade systems create a financial incentive for companies to reduce emissions by setting a limit on total emissions allowed. By allocating permits that can be traded, companies are encouraged to lower their emissions below their allocated limit so they can sell excess permits for profit. This market-driven approach fosters innovation as companies seek cost-effective methods for reducing their environmental impact.
• Evaluate the effectiveness of cap-and-trade systems in promoting sustainable development and how they interact with international environmental governance.
  • Cap-and-trade systems can effectively promote sustainable development by integrating economic growth with environmental protection. They allow countries and businesses to meet international climate agreements while encouraging investments in cleaner technologies. However, the effectiveness of these systems is influenced by regulatory frameworks, enforcement mechanisms, and the overall design of the market, which must balance economic interests with robust environmental goals.
• Assess the potential long-term impacts of cap-and-trade systems on global efforts to combat climate change and their role within international climate agreements.
  • Cap-and-trade systems have the potential to play a significant role in global climate change mitigation efforts by establishing a flexible and market-oriented approach to emissions reductions. As countries work together through international agreements like the Paris Accord, these systems can facilitate cooperation and technology transfer among nations. However, their success depends on strong political will, public support, and effective regulatory frameworks that ensure equitable participation and meaningful reductions across all sectors, addressing criticisms related to fairness and effectiveness.

Related terms

Emissions Trading: A market-based approach that allows companies to buy and sell allowances for greenhouse gas emissions, providing a financial incentive to reduce pollution.

Carbon Credits: Permits that allow the holder to emit one ton of carbon dioxide or its equivalent in other greenhouse gases, used within cap-and-trade systems.

Regulatory Framework: The set of laws and regulations established by governments to guide the implementation and functioning of cap-and-trade systems.