The national program builds on pilot emissions trading systems, which have included elements of cap and trade and are already underway in seven cities and provinces in China. The centerpiece is the cap-and-trade program , which EDF has helped design and implement. Cap and trade makes even deeper cuts possible when countries cooperate, such as the United States and Canada.
California and Quebec connected their systems in , building a strong market that shows great potential. Every day more than 60 people sign up for news and alerts, to find out when their support helps most.
Will you join them? Read our privacy policy. How cap and trade works Cap and trade reduces emissions, such as those from power plants, by setting a limit on pollution and creating a market. Caps limit harmful emissions The government sets the cap across a given industry, or ideally the whole economy. Companies are allowed to emit set amounts The total amount of the cap is split into allowances, each permitting a company to emit one ton of emissions. Trading can lead to cuts in pollution sooner Companies that cut their pollution faster can sell allowances to companies that pollute more, or "bank" them for future use.
Cap and trade lets the market find the cheapest way to cut emissions. Complementary Policies — Will cap and trade be the primary policy tool for reducing emissions or will it stand alongside other policies like renewable portfolio standards or vehicle efficiency standards that also help achieve climate goals? Complementary policies will influence the carbon price and the pace of emissions reduction.
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Computer modeling and other analytical techniques can provide guidance to policymakers on the costs and results of different sets of climate action. Scope — What emission sources and greenhouse gases will be covered by the cap? For example, RGGI covers CO 2 from power plants while California covers several greenhouse gases from power plants, manufacturing facilities, transportation, and buildings. For administrative ease, programs tend to include only the largest sources of greenhouse gases in the economy.
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Target — What level of emissions reduction will be required and by when? For example, the annual allowance budget in California will be calculated to put the state on a path to meeting its target to cut emissions to levels, and target to cut emissions to 40 percent below levels.
Cap-and-Trade Program | California Air Resources Board
Allowance Allocation — How will allowances be distributed? Governments can auction allowances, give them away for free to covered facilities, or some combination of the two. Auctioning generates revenue that can be used for climate or other purposes. Both banking and borrowing help avoid price spikes.
Borrowing, however, can create supply constraints in future years. Most programs allow banking but not borrowing. Compliance Periods — Must facilities surrender allowances every year or only every few years? Multi-year compliance periods can reduce price volatility. RGGI and California both use three-year compliance periods with partial annual surrender obligations.
Offsets — Can companies use verified emissions reductions generated outside the cap to comply? Offsets can lower the overall costs of meeting the cap. Apply market research to generate audience insights. Measure content performance.
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Cap and trade is a common term for a government regulatory program designed to limit, or cap, the total level of emissions of certain chemicals, particularly carbon dioxide, as a result of industrial activity. Proponents of cap and trade argue that it is a palatable alternative to a carbon tax. Both measures are attempts to reduce environmental damage without causing undue economic hardship to the industry. A cap-and-trade program can work in a number of ways, but here are the basics.
A government issues a limited number of annual permits that allow companies to emit a certain amount of carbon dioxide. The total amount permitted thus becomes the "cap" on emissions. Companies are taxed if they produce a higher level of emissions than their permits allow. Companies that reduce their emissions can sell, or "trade," unused permits to other companies. But the government lowers the number of permits each year, thereby lowering the total emissions cap.
That makes the permits more expensive. Over time, companies have an incentive to invest in clean technology as it becomes cheaper than buying permits. The cap-and-trade system is sometimes described as a market system. That is, it creates an exchange value for emissions. Its proponents argue that a cap-and-trade program offers an incentive for companies to invest in cleaner technologies in order to avoid buying permits that will increase in cost every year.
Cap and Trade
Opponents argue that it could lead to an overproduction of pollutants up to the maximum levels set by the government each year. They predict that the allowable levels could be set too generously, actually slowing the move to cleaner energy. One issue in establishing a cap-and-trade policy is whether a government would impose the correct cap on the producers of emissions. A cap that is too high may lead to even higher emissions, while a cap that is too low would be seen as a burden on the industry and a cost that would be passed on to consumers.