Cap-and-trade

Definition

Cap-and-trade is an environmental policy tool designed to reduce greenhouse gas emissions by setting a limit (cap) on the total amount of emissions allowed and enabling companies to buy and sell permits (trade) for emissions. This market-based approach encourages industries to lower their emissions efficiently, as companies that reduce emissions below their allotted cap can sell excess permits to those exceeding their limits, promoting overall emissions reduction in a cost-effective manner.

5 Must Know Facts For Your Next Test

1. Cap-and-trade programs can be implemented at various levels, including local, national, or international scales, allowing for flexibility in addressing emissions reductions.
2. The cap is typically reduced over time, leading to decreased emissions overall as companies must adapt to stricter limits.
3. By putting a price on carbon emissions, cap-and-trade creates financial incentives for businesses to innovate and adopt cleaner technologies.
4. Successful cap-and-trade systems have been established in regions such as the European Union and California, demonstrating practical applications of the concept.
5. Critics argue that cap-and-trade can lead to market manipulation and may not adequately address the urgency of climate change compared to direct regulatory measures.

Review Questions

• How does the cap-and-trade system encourage companies to reduce their greenhouse gas emissions?
  • The cap-and-trade system encourages companies to reduce their greenhouse gas emissions by creating a financial incentive through the buying and selling of emission permits. Companies that can cut their emissions at lower costs can sell their excess permits to those who face higher costs for reduction. This market-driven approach fosters innovation and efficiency, allowing companies to find the most economical way to meet their emission reduction goals.
• Evaluate the effectiveness of cap-and-trade systems in achieving greenhouse gas emission reduction targets.
  • Cap-and-trade systems have shown varying degrees of effectiveness in achieving greenhouse gas emission reduction targets. In successful implementations, like the European Union Emissions Trading System, there has been a measurable decrease in emissions. However, challenges such as fluctuating permit prices, potential loopholes, and the risk of market manipulation can hinder the overall success of these systems. A thorough evaluation must consider both environmental outcomes and economic impacts.
• Assess the potential long-term implications of cap-and-trade on global efforts to combat climate change.
  • The long-term implications of cap-and-trade on global efforts to combat climate change could be significant if implemented effectively. By promoting a market-based mechanism for emissions reductions, cap-and-trade could lead to widespread adoption of cleaner technologies and practices across industries. However, its success hinges on robust regulatory frameworks and international cooperation. If mismanaged or criticized for inadequacies, it may undermine public trust in climate initiatives and stall progress toward necessary global emissions reductions.

Related terms

Greenhouse Gas Emissions: Gases that trap heat in the atmosphere, contributing to global warming and climate change, including carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O).

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

Carbon Credits: Permits that represent the right to emit one ton of carbon dioxide or the equivalent amount of a different greenhouse gas, which can be bought and sold in the cap-and-trade system.