Cap-and-trade

Definition

Cap-and-trade is an environmental policy tool that limits overall emissions by setting a cap on the total amount of greenhouse gases that can be emitted by regulated entities. This system allows companies with lower emissions to sell their extra allowances to companies that are exceeding their emissions, creating a financial incentive to reduce pollution and innovate in cleaner technologies.

5 Must Know Facts For Your Next Test

1. Cap-and-trade programs have been implemented in various regions, including the European Union, California, and certain sectors under the Clean Air Act in the United States.
2. The cap is typically reduced over time, aiming for gradual decreases in emissions and encouraging companies to invest in cleaner technologies.
3. Market participants can trade allowances, meaning companies that find it cheaper to reduce emissions can do so and sell their excess allowances, promoting economic efficiency.
4. Cap-and-trade can help meet international climate agreements by creating a framework for reducing emissions while allowing flexibility in how those reductions are achieved.
5. Critics argue that cap-and-trade can lead to market manipulation and may not adequately reduce emissions if caps are set too high.

Review Questions

• How does cap-and-trade facilitate economic efficiency in emissions reduction compared to traditional regulatory approaches?
  • Cap-and-trade facilitates economic efficiency by allowing companies the flexibility to buy and sell emissions allowances. This market-driven approach encourages companies that can reduce emissions at lower costs to do so while allowing those facing higher costs to purchase allowances instead. By letting the market determine the price of emissions reductions, cap-and-trade minimizes overall compliance costs and incentivizes innovation in cleaner technologies.
• Evaluate the effectiveness of cap-and-trade programs in achieving long-term environmental goals compared to other policy tools like carbon taxes.
  • Cap-and-trade programs have shown effectiveness in reducing emissions when properly designed, as they provide a clear limit and create a financial incentive for companies to lower their pollution. However, compared to carbon taxes, which provide certainty about the price of carbon but not about the total amount of emissions reductions, cap-and-trade can sometimes lead to volatility in allowance prices. The success of either approach largely depends on how stringent the caps are set and how effectively the systems are monitored and enforced.
• Analyze how cap-and-trade has evolved within U.S. environmental law frameworks, particularly with respect to the Clean Air Act Amendments.
  • Cap-and-trade has evolved significantly within U.S. environmental law frameworks, especially following the Clean Air Act Amendments. The Acid Rain Program established an early example of a cap-and-trade system aimed at reducing sulfur dioxide emissions from power plants, leading to significant reductions at lower costs than traditional regulation. More recently, various states and regions have adopted cap-and-trade systems targeting greenhouse gases, influencing national discussions on climate policy. This evolution reflects a shift towards market-based solutions in environmental regulation, demonstrating both the potential for innovative approaches and ongoing challenges in achieving comprehensive national climate goals.

Related terms

Emissions Trading System (ETS): A market-based approach to controlling pollution by providing economic incentives for achieving reductions in the emissions of pollutants.

Carbon Credits: Permits that allow the holder to emit a specific amount of carbon dioxide or other greenhouse gases; one credit usually equals one ton of CO2.

Carbon Tax: A tax imposed on the carbon content of fuels, aimed at reducing greenhouse gas emissions by making fossil fuels more expensive.