key term - Cap and Trade

Definition

Cap and trade is a market-based approach to controlling pollution by providing economic incentives for achieving reductions in the emissions of pollutants. It sets a limit (cap) on the total amount of a specific pollutant that can be emitted, and then allows entities to buy and sell emission allowances (trade) in order to meet their reduction targets.

5 Must Know Facts For Your Next Test

1. The cap in a cap and trade system sets a limit on the total amount of a specific pollutant that can be emitted, creating scarcity and driving up the price of emissions.
2. Companies or entities that emit less than their allocated allowances can sell their surplus allowances to those who emit more, creating a financial incentive to reduce emissions.
3. Cap and trade systems are designed to achieve emissions reductions at the lowest possible cost by allowing the market to determine the price of emissions.
4. Offsets, which represent emissions reductions made elsewhere, can be used by companies to meet their emissions reduction targets under a cap and trade system.
5. Cap and trade has been implemented in various forms around the world, including the European Union Emissions Trading System (EU ETS) and the Regional Greenhouse Gas Initiative (RGGI) in the northeastern United States.

Review Questions

• Explain how the cap in a cap and trade system creates incentives for emissions reductions.
  • The cap in a cap and trade system sets a limit on the total amount of a specific pollutant that can be emitted. This creates scarcity, which drives up the price of emissions allowances. Companies or entities that emit less than their allocated allowances can sell their surplus allowances to those who emit more, creating a financial incentive to reduce emissions. The higher the price of allowances, the greater the incentive for companies to invest in emissions-reducing technologies or practices in order to avoid the cost of purchasing additional allowances.
• Describe the role of offsets in a cap and trade system and how they can be used to meet emissions reduction targets.
  • Offsets in a cap and trade system represent emissions reductions made elsewhere, such as through projects that remove or sequester greenhouse gases from the atmosphere. Companies can use offsets to meet their emissions reduction targets under the cap and trade system, effectively compensating for their own emissions by investing in emissions-reducing activities elsewhere. The use of offsets allows for more flexibility and cost-effectiveness in achieving overall emissions reductions, as companies can choose the most cost-effective way to meet their targets, whether through internal reductions or the purchase of offsets.
• Evaluate the potential benefits and drawbacks of implementing a cap and trade system as a market-based approach to environmental regulation.
  • The potential benefits of a cap and trade system include the ability to achieve emissions reductions at the lowest possible cost, as the market determines the price of emissions allowances. This creates a financial incentive for companies to invest in emissions-reducing technologies and practices. Additionally, the use of offsets can further increase the cost-effectiveness of the system. However, potential drawbacks include the complexity of the system, the potential for market manipulation, and the challenge of setting the appropriate emissions cap. There are also concerns about the fairness of the system, as it may disproportionately impact certain industries or communities. Ultimately, the success of a cap and trade system depends on careful design, implementation, and monitoring to ensure it achieves its environmental goals in an equitable and cost-effective manner.

Related terms

Emissions Trading:

A system that allows companies or countries to buy or sell permits to emit a certain amount of a pollutant, such as carbon dioxide.

Allowance: A permit that allows the holder to emit a certain amount of a pollutant, such as one ton of carbon dioxide, within a given time period.

Offset: A reduction in emissions of greenhouse gases made in order to compensate for or to offset an emission made elsewhere.