Cap-and-Trade

Definition

Cap-and-trade is an environmental policy tool that aims to reduce greenhouse gas emissions by setting a limit, or cap, on total emissions and allowing companies to buy and sell permits to emit a certain amount. This market-based approach incentivizes companies to lower their emissions since they can profit from selling any unused allowances, fostering innovation and investment in cleaner technologies while also encouraging compliance with regulatory goals.

5 Must Know Facts For Your Next Test

1. Cap-and-trade programs set an overall limit on emissions while allowing businesses flexibility in how they meet their targets.
2. The program creates a financial incentive for companies to innovate and reduce their emissions, as they can sell excess allowances on the market.
3. Cap-and-trade has been implemented in various regions, including California and the European Union, demonstrating its effectiveness in reducing overall emissions.
4. The cap is usually reduced over time, making it increasingly challenging for companies to meet their targets and pushing them towards greener practices.
5. Critics argue that cap-and-trade can lead to 'hot spots' where pollution is concentrated in specific areas, rather than being evenly reduced across regions.

Review Questions

• How does cap-and-trade create incentives for companies to reduce their greenhouse gas emissions?
  • Cap-and-trade creates financial incentives for companies by allowing them to buy and sell emission allowances. When a company reduces its emissions below the cap, it can sell its excess allowances for profit. This system encourages innovation and investment in cleaner technologies since firms aim to minimize their costs while maximizing potential revenues from selling unused permits.
• Evaluate the effectiveness of cap-and-trade programs implemented in regions like California and the European Union regarding their impact on emission reduction.
  • Cap-and-trade programs in California and the European Union have shown measurable success in reducing greenhouse gas emissions. In California, the program has contributed to significant declines in emissions from regulated sectors while promoting economic growth. Similarly, the EU's Emissions Trading System has led to a decrease in carbon emissions from power plants and industrial facilities, demonstrating that market-based approaches can effectively drive down emissions while maintaining economic activity.
• Analyze the potential drawbacks of cap-and-trade systems, including concerns about environmental justice and regulatory challenges.
  • While cap-and-trade systems can effectively reduce overall emissions, they also raise concerns about environmental justice, as poorer communities may be disproportionately affected by localized pollution from companies buying allowances. Additionally, the complexity of managing trading markets can create regulatory challenges, leading to issues such as manipulation or loopholes that undermine the system's integrity. Addressing these drawbacks is crucial to ensure that cap-and-trade systems are both effective and equitable in achieving climate change mitigation goals.

Related terms

Greenhouse Gas Emissions: Gases such as carbon dioxide and methane that trap heat in the atmosphere, contributing to global warming and climate change.

Emissions Trading System (ETS): A market-based approach to controlling pollution by providing economic incentives for reducing emissions, similar to cap-and-trade but often implemented on a larger scale.

Carbon Offset: A reduction in greenhouse gas emissions, such as planting trees or investing in renewable energy projects, which can be used to compensate for emissions produced elsewhere.