Cap-and-trade system

Definition

A cap-and-trade system is an environmental policy tool designed to reduce greenhouse gas emissions by setting a limit (cap) on total emissions and allowing companies to buy and sell permits to emit those gases. This market-based approach incentivizes companies to lower their emissions, as they can profit from selling excess permits if they emit less than their allocated amount. By placing a financial value on emissions, the system encourages innovation and investment in cleaner technologies.

5 Must Know Facts For Your Next Test

1. Cap-and-trade systems have been implemented in various regions, including the European Union and California, as part of efforts to meet climate goals.
2. The cap is usually reduced over time, which means that the total number of emission permits decreases, creating a stronger incentive for companies to cut their emissions.
3. Cap-and-trade can lead to cost-effective reductions in emissions since it allows companies that can reduce emissions cheaply to sell their permits to those facing higher costs.
4. The success of a cap-and-trade system relies heavily on accurate monitoring and enforcement to ensure that emissions are tracked and capped effectively.
5. Critics argue that cap-and-trade may allow larger polluters to continue emitting if they can afford to buy more permits, potentially undermining the environmental goals.

Review Questions

• How does the cap-and-trade system create incentives for companies to reduce their greenhouse gas emissions?
  • The cap-and-trade system creates financial incentives for companies by establishing a limit on total emissions and allowing them to trade emission permits. Companies that manage to lower their emissions below their allocated cap can sell their surplus permits to other companies that exceed their limits. This market-driven approach not only encourages firms to innovate and adopt cleaner technologies but also allows them to benefit financially from reducing their environmental impact.
• Evaluate the effectiveness of cap-and-trade systems compared to carbon taxes in reducing greenhouse gas emissions.
  • Cap-and-trade systems can be effective because they set a clear limit on emissions while creating a financial market for trading permits. This market mechanism allows reductions to occur where they are cheapest. However, carbon taxes provide more predictable pricing for emissions, which can simplify planning for businesses. The effectiveness of each approach can depend on various factors such as regulatory framework, market stability, and public acceptance.
• Assess the potential challenges and criticisms associated with implementing a cap-and-trade system in Canada.
  • Implementing a cap-and-trade system in Canada faces several challenges, including the need for robust monitoring and enforcement mechanisms to ensure compliance with emission limits. Critics point out that such systems may allow larger polluters to continue operating if they can afford to purchase permits, raising concerns about equity and actual emission reductions. Additionally, regional disparities in economic reliance on fossil fuels could lead to political resistance, complicating nationwide implementation efforts aimed at addressing climate change.

Related terms

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

Emission Permits: Certificates that allow the holder to emit a specific amount of greenhouse gases; these can be bought, sold, or traded within a cap-and-trade system.

Carbon Tax: A fee imposed on the carbon content of fuels, aimed at reducing greenhouse gas emissions by making fossil fuels more expensive.