Cap and Trade Summary

How Cap and Trade Works

Core Principles of Cap and Trade

• Definition: Cap and trade is an environmentally and economically sound climate policy approach that limits emissions and puts a price on them.
• Function: It is a system designed to reduce pollution in the atmosphere.
• Mechanism:
  • Sets a firm cap (limit) on pollution, particularly greenhouse gas emissions that drive global warming. This cap becomes stricter over time.
  • Creates a market where companies can buy and sell allowances to emit a certain amount of pollution; supply and demand determine the price of these allowances.
  • Incentivizes companies to save money by reducing emissions in the most cost-effective ways.

Cap Mechanism

• Government's Role:
  • The government sets the cap across a specific industry or, ideally, the entire economy.
  • It also determines penalties for violations of the cap.
• Target Pollutants:
  • The primary targets are carbon dioxide and related pollutants that contribute to global warming.
  • Other pollutants contributing to smog can also be capped.
• Global Impact: Reducing carbon dioxide emissions locally helps lower global levels because it mixes into the upper atmosphere.
• Allowances:
  • The total cap is divided into allowances, each permitting a company to emit one ton of emissions.
  • Example: Driving approximately 2,400 miles (the distance between New York and Las Vegas) emits about one ton of carbon dioxide.
  • The government distributes these allowances to companies, either for free or via auction.

Trade Mechanism

• Incentives Over Time: The cap typically declines over time, incentivizing industries and businesses to reduce their emissions more efficiently while maintaining production costs.
• Flexibility and Innovation:
  • Companies that reduce pollution faster can sell allowances to those that pollute more or save them for future use (