Cap-and-trade

Definition

Cap-and-trade is an environmental policy tool that sets a limit (or cap) on the total level of greenhouse gas emissions allowed for specific industries or sectors, allowing companies to buy and sell permits to emit these gases. This market-based approach provides economic incentives for reducing emissions, as companies that can lower their emissions more cheaply can sell their excess allowances to those who face higher costs, ultimately encouraging innovation and investment in cleaner technologies.

5 Must Know Facts For Your Next Test

1. Cap-and-trade programs are designed to reduce overall emissions while providing flexibility for businesses to manage their compliance costs.
2. These programs often start with a set limit on emissions that decreases over time, creating a declining cap that encourages continual improvement.
3. Companies that exceed their emissions allowances can purchase credits from those who have reduced theirs, creating a financial incentive to cut back on pollution.
4. The effectiveness of cap-and-trade systems depends on proper monitoring and enforcement to prevent fraud and ensure compliance.
5. Several regions and countries have implemented cap-and-trade systems, with notable examples being the European Union Emissions Trading System and California's Cap-and-Trade Program.

Review Questions

• How does cap-and-trade incentivize companies to reduce their greenhouse gas emissions?
  • Cap-and-trade incentivizes companies by establishing a market for emissions allowances, where businesses can buy and sell permits. Companies that can reduce their emissions at a lower cost can sell their extra allowances to those facing higher costs. This market-driven approach motivates firms to innovate and invest in cleaner technologies since lowering emissions not only helps them meet regulatory requirements but can also generate revenue through the sale of surplus permits.
• Evaluate the advantages and disadvantages of implementing a cap-and-trade system for managing greenhouse gas emissions.
  • One advantage of cap-and-trade is its flexibility; companies can choose how best to comply with emission limits based on their individual circumstances. This system can lead to cost-effective reductions in emissions and promote technological innovation. However, disadvantages include the potential for market manipulation and the complexity of establishing an effective monitoring system. Additionally, if caps are set too leniently, they may not lead to significant reductions in overall emissions.
• Assess the impact of global cap-and-trade initiatives on international climate policy and cooperation among nations.
  • Global cap-and-trade initiatives have significantly influenced international climate policy by demonstrating how market-based approaches can effectively reduce greenhouse gas emissions. These initiatives promote cooperation among nations by creating frameworks for emission reduction targets and trading mechanisms. However, disparities in economic capabilities and environmental priorities can hinder collaboration, as some countries may be hesitant to commit to stringent targets without financial or technical support from developed nations. Overall, successful cap-and-trade systems can serve as models for future international agreements aimed at addressing climate change collectively.

Related terms

Emission Trading System: 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 certain amount of carbon dioxide or other greenhouse gases, often used in cap-and-trade systems.

Greenhouse Gases: Gases that trap heat in the atmosphere, contributing to global warming, including carbon dioxide, methane, and nitrous oxide.