Cap-and-trade

Definition

Cap-and-trade is an environmental policy tool that allows countries or companies to limit their greenhouse gas emissions by setting a cap on total emissions and allowing the trading of emission permits. This system creates a financial incentive for organizations to reduce their emissions, as they can sell excess allowances if they emit less than their cap, thereby promoting sustainability and reducing overall pollution.

5 Must Know Facts For Your Next Test

1. The cap is set by regulatory authorities, and it is gradually lowered over time to encourage ongoing emissions reductions.
2. Companies that exceed their emission allowances can purchase additional permits from those who have reduced their emissions, creating a market for carbon credits.
3. Cap-and-trade systems have been implemented in various regions, including the European Union and California, each with different rules and structures.
4. Critics argue that cap-and-trade may not sufficiently address the urgency of climate change and that it could lead to 'hot spots' where pollution is concentrated.
5. Successful implementation of cap-and-trade relies on accurate monitoring, reporting, and verification of emissions to ensure the integrity of the system.

Review Questions

• How does cap-and-trade create economic incentives for companies to reduce emissions?
  • Cap-and-trade creates economic incentives by allowing companies to buy and sell emission permits. When a company reduces its emissions below its allocated cap, it can sell its excess permits to other companies that may be struggling to meet their limits. This creates a financial benefit for companies that invest in cleaner technologies and practices, encouraging a market-driven approach to reducing overall greenhouse gas emissions.
• Discuss the potential drawbacks of implementing a cap-and-trade system for managing greenhouse gas emissions.
  • One major drawback of cap-and-trade systems is the potential for inequitable distribution of pollution. Some companies may find it cheaper to buy permits rather than reduce their emissions, leading to localized pollution 'hot spots' where certain areas suffer disproportionately from high emissions. Additionally, if caps are set too high or enforcement is weak, the system may fail to achieve significant reductions in overall greenhouse gases. This raises concerns about the effectiveness of cap-and-trade as a comprehensive solution for climate change.
• Evaluate how cap-and-trade systems could be adapted to enhance their effectiveness in combating climate change on a global scale.
  • To enhance the effectiveness of cap-and-trade systems globally, several adaptations could be considered. First, establishing stricter and more uniform caps across countries can help prevent issues like carbon leakage, where businesses move operations to regions with lax regulations. Additionally, integrating carbon pricing mechanisms globally could create a unified market that drives investment in green technologies worldwide. Increasing transparency and accountability through robust monitoring systems would also ensure compliance and foster trust in the market. Lastly, coupling cap-and-trade with renewable energy incentives can lead to a more holistic approach to reducing greenhouse gas emissions.

Related terms

Carbon Credits: Permits that allow the holder to emit a certain amount of carbon dioxide or other greenhouse gases, often traded in cap-and-trade systems.

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

Pollution Permit: A license that allows a company to emit a specific amount of pollutants; these permits can be bought and sold in a cap-and-trade system.