Cap and trade is a
market-based policy tool for protecting human health and the environment
by controlling large amounts of emissions from a group of sources. A cap
and trade program first sets an aggressive cap, or maximum limit, on
emissions. Sources covered by the program then receive authorizations to
emit in the form of emissions allowances, with the total amount of
allowances limited by the cap. Each source can design its own compliance
strategy to meet the overall reduction requirement, including the sale or
purchase of allowances, installation of pollution controls, and
implementation of efficiency measures, among other options. Individual
control requirements are not specified under a cap and trade program, but
each emission source must surrender allowances equal to its actual
emissions in order to comply. Sources must also completely and accurately
measure and report all emissions in a timely manner to guarantee that the
overall cap is achieved.
What Is a Cap-and-Trade
A cap-and-trade program is
an environmental policy tool designed to reduce emissions of a pollutant
by placing a limit (or cap) on the total amount of emissions that can be
released by sources covered by the program during a fixed time period.
The overall cap on
emissions is implemented through a system of allowances. Each allowance
represents the right to emit a specific amount of emissions, and each
emissions source covered by the program must submit enough allowances to
cover its actual emissions. These allowances, sometimes called permits,
are initially allocated to affected sources or auctioned off by the agency
implementing the program.
How a Cap-and-Trade
Allowances can be traded,
which creates an incentive for those who can reduce emissions most cheaply
to sell their allowances to those who face higher emission reduction
costs. The incentive to trade allowances persists as long as one or more
sources can reduce emissions by an additional unit at a lower cost than
some other source faces to achieve its last unit of emissions reduction.
Therefore, allowances will be traded until the marginal cost of emission
reduction is equal across all covered sources. At this point, the
pollution level required by the cap is achieved — theoretically at the
lowest possible cost to society — regardless of how the allowances were
How Does a Cap-and-Trade
Not all cap-and-trade
programs are identical. Below is a list of four characteristics shared by
all cap-and-trade programs, with some possible variations shown. These
variations could affect how a particular program works.
1. A limit or cap on
emissions of a pollutant is established.
Who is required to
limit their emissions. Is it all sources of emissions or just some
sources of emissions?
What area the cap
covers. Is it a region or State, the whole United States, or a
group of nations?
When emission limits
take effect. Will the cap be in place in the near term or at a
Whether the cap will
become tighter, meaning the total allowable level of emissions drops
over time. If so, how quickly will this decrease happen?
When the cap is in
place. Will it be in effect for a season — such as just for the
summer months — or is it applied for the whole year?
2. An allowance must be
surrendered for every unit (often a ton) of emissions generated.
Who must submit
allowances. While this depends on the specific cap-and-trade
program, some examples include producers of the polluting substance,
distributors of a product whose production or consumption generates
emissions, States, or even nations.
How allowances are
initially distributed. Allowances could be auctioned, distributed
for free based on current or historical emissions, or given out using
some combination of an auction and a free distribution. In an auction,
allowances are sold to the highest bidders. Uses of auction revenue
depend on the specific cap-and-trade program, and could include the
distribution of a portion of the revenue to consumers.
Whether the program
allows for the purchase of offsets in lieu of allowances. Offsets
are certified reductions in emissions from sources that are not
required by the cap-and-trade program to restrict their emissions.
3. Allowances can be
Here's an example of how
the trade could work. Emitter ABC found it really easy and cheap to reduce
its emissions below the level covered by its allowances, while Emitter XYZ
had a tougher time. ABC was able to make larger reductions in its
emissions and offered to sell its extra allowances to XYZ. This
transaction was a good deal for XYZ because the cost of allowances it
bought was lower than the cost of equipment needed to reduce its own
emissions to a level that matched the number of allowances it held before
buying more allowances from ABC.
How much an allowance
costs. In general, the allowance price depends on the options
available to reduce emissions and the demand for allowances. If there
are relatively low-cost options to reduce emissions, the price of
allowances would be lower.
Whether emitters are
allowed to save — or “bank” — allowances, either for their own
future use or to sell to someone else later. Some proposals might
also allow the current use of a future period’s allowances.
4. Actual emissions are
measured and penalties are assessed if targets are missed.
Depending on the
program, these tasks could be the responsibility of one or more
How Do Cap-and-Trade
Programs Affect Our Use of Energy?
The burning of fossil
fuels, including coal, oil, and natural gas, is the main source of carbon
dioxide — the most important greenhouse gas produced by human activity
— and a major source of other emissions. A cap-and-trade program for
greenhouse gas emissions would increase the cost of using fossil fuels,
making them less competitive with non-fossil energy resources and
increasing the overall cost of energy to consumers. The cost of using
coal, which has the highest carbon dioxide content and the lowest price
per unit of energy among the fossil fuels, would be most affected by a
cap-and-trade program for greenhouse gases.
Why Might a Cap-and-Trade
Program Be Considered?
A cap-and-trade program
allows emitters to have flexibility in their approach to reducing
emissions. An alternative environmental policy might require each
regulated source to use a specific emission control technology. With a
cap-and-trade program, the overall cap on emissions is fixed, but the
compliance approach by any individual source need not be specified. This
flexibility allows parties to choose the least costly option and should
reduce the cost of reaching the overall emissions cap.
The implementation of the
U.S. cap-and-trade program for sulfur dioxide beginning in 1995 is an
example of the benefits of flexibility in reducing environmental
compliance costs in the energy sector. Allowances for sulfur dioxide
emissions were actively traded as coal-fired electricity generating units
covered by the program chose a variety of compliance strategies. These
strategies included installing scrubbers, switching to lower sulfur coal,
and buying allowances.
Where Has Cap-and-Trade
Cap-and-trade programs have
been used to limit several different types of emissions in State, U.S.,
and international contexts.
As noted above, a
cap-and-trade program limiting sulfur dioxide emissions has been
operating in the United States since 1995.
The European Union
established its Emissions Trading System for greenhouse gas emissions
In 2009, the Regional
Greenhouse Gas Initiative established an interstate cap-and-trade
system for greenhouse gas emissions covering electric power plants in
10 northeastern States. Recently, there has been a lot of discussion
about the Federal Government establishing a nationwide cap-and-trade
program for greenhouse gas emissions.
The following are
some excerpts from the Testimony of James E. Hansen NASA Goddard Institute for
Space Studies to The Committee on Ways and Means United States House of
Representatives on Cap and Trade
Trade (a.k.a., ‘Cap & Trade’, pseudonymously and sometimes
‘Cap & Trade’
increases costs to the public as does ‘Tax & Dividend’, but without the
dividend. Thus it should be termed ‘Tax & Trade’. Part of the reason for
the pseudonym is to avoid the stigma of a tax, under the presumption that the
public is too gullible to figure it out. Other parties support ‘Cap &
Trade’ because they hope to profit – it is a give-away to special interests,
who feel, based on extensive empirical evidence, that they will be able to
manipulate the program through their lobbyists. Except for its stealth approach
to taxing the public, and its attraction to special interests, ‘Cap &
Trade’ seems to have little merit."
not have a prayer of phasing out fossil fuel emissions fast enough to save the
planet, e.g., allowing us to phase-out coal-fired power plants. Clearly there
must be people in the Obama administration who understand that. Yet
Cap&Trade is still talked about as if it were something good. One wonders:
do they really believe we have "a planet in peril"?
testimony I noted that a "Cap" raises the price of energy, just as
does a simple honest carbon tax on oil, gas and coal at the first sale at the
mine or port of entry. "Cap" is a pseudonym, disguising the fact that
it is a tax, assuming that the public is a bunch of dummies, who will never
catch on. With all its hooks and eyes, Cap&Trade will allow a lot of funny
business. At least we would get a few Wall Street millionaires back in business,
via speculation and gaming the Cap&Trade system (funded by John Q. Public,
On the train I read
on politico.com that the number of lobbyists in DC working to influence federal
policy on climate change increased in the past few years by 300% to 2,340
lobbyists -- four climate lobbyists for every member of Congress. At least the
alligator shoe business is doing well. Not too good for alligators,
Cap-and-trade offers Wall Street a new opportunity to make money
Banks like Goldman
Sachs and Credit Suisse have formed New York climate desks ahead of U.S.
regulations, in part because the country could be a big buyer of global credits
if world carbon markets eventually link up.
The charts below show the
increase of green house gases from 1990 to 2009.
Gas Emissions by Gas
Change in U.S. Greenhouse Gas Emissions
in Annual U.S. Greenhouse Gas Emissions Relative to 1990
2009 CO2 Emissions
from Fossil Fuel Combustion by Sector and Fuel Type
Source: EPA 2011 U.S. Greenhouse
Gas Inventory Report
The increased costs imposed by a
cap-and-trade program would be passed down by companies to their consumers in
the form of higher prices on energy products.
The estimates by people
supporting Cap and Trade are that the average family will pay an extra $350.00 a
year for increased costs associated with this program. The opponents estimate
the amount to be over $3000.00.
Many companies and individuals
will get very rich with cap and trade.
Everything in the United States
will cost more to the end user -the consumer. And the effect on global
warming and climate
change will be minimal if at all.
compiled from The British Antarctic Study, NASA, Environment Canada,
UNEP, EPA and other sources as stated and credited Researched by Charles
Welch-Updated daily This Website is a project of the The Ozone Hole Inc.
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