Cap-and-trade

Definition

Cap-and-trade is an environmental policy tool that aims to reduce greenhouse gas emissions by setting a limit (cap) on the total amount of emissions allowed, while enabling companies to buy and sell permits to emit a certain amount (trade). This market-based approach incentivizes businesses to lower their emissions and innovate in cleaner technologies, promoting overall reductions in greenhouse gas output.

5 Must Know Facts For Your Next Test

1. Cap-and-trade programs set a firm limit on emissions, ensuring that the total pollution does not exceed a certain level.
2. Companies that reduce their emissions below their allotted cap can sell their excess allowances to other firms that are struggling to meet their limits.
3. This system encourages innovation because businesses are motivated to find cost-effective ways to reduce emissions.
4. The revenues generated from auctioning emissions permits can be used to fund renewable energy projects and other climate initiatives.
5. Cap-and-trade has been implemented in various regions, such as the European Union's Emissions Trading System and California's cap-and-trade program.

Review Questions

• How does cap-and-trade create economic incentives for companies to reduce greenhouse gas emissions?
  • Cap-and-trade creates economic incentives by allowing companies to buy and sell emission permits. If a company reduces its emissions below its allocated cap, it can sell its excess permits to others who need them, creating a financial reward for lower emissions. This system motivates businesses to invest in cleaner technologies and more efficient processes, as cutting emissions can lead to profit through permit sales.
• What are the potential advantages and disadvantages of implementing a cap-and-trade system for reducing greenhouse gas emissions?
  • The advantages of cap-and-trade include providing a clear economic signal to reduce emissions, encouraging innovation, and generating revenue through permit auctions. However, disadvantages can include the complexity of implementation, potential market manipulation, and the risk that caps may not be stringent enough to achieve desired environmental goals. Balancing these factors is crucial for the effectiveness of such programs.
• Evaluate the impact of cap-and-trade systems on long-term climate change mitigation strategies and their role in achieving international climate goals.
  • Cap-and-trade systems can significantly impact long-term climate change mitigation strategies by establishing a price on carbon emissions and driving down overall pollution levels. They align with international climate goals by providing a flexible mechanism for countries and companies to meet their obligations under agreements like the Paris Agreement. However, for cap-and-trade to be truly effective, caps must be set at levels that will lead to meaningful reductions, and these systems should be complemented with additional policies aimed at fostering sustainable practices across various sectors.

Related terms

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

Emissions Trading System (ETS): A market-based system where countries or companies can buy and sell allowances for greenhouse gas emissions to meet national or international targets.

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