How Cap And Trade System Works…

17October 2014

 

How Cap And Trade System Works

Cap-and-trade is a market-based approach to reducing pollution. It is one of the sensible approaches towards the reduction of greenhouses gases by the industries. It involves creating a market where GHG emission allowances can be bought and sold by entities, i.e. It allows governments to set an overall cap on greenhouse gas emissions and companies that exceed the limit can purchase carbon credits, or allowances, from firms that remain below the cap.

The less they emit, the less they pay, so it is in their economic incentive to pollute less.

The primary objective of the Cap and Trade system is to reduce Green House Gas emissions in the highest emitting sectors, i.e., transportation, industry, building, electric power generation, natural gas, transportation, and large manufacturers by promoting energy efficiency as well as the use of energy from renewable sources.

The “cap” sets a limit on emissions, which is lowered over time to reduce the amount of pollutants released into the atmosphere. It is measured in billions of tons of carbon dioxide (or equivalent) per year. Emission allowances are distributed to the industries or they are auctioned.

One allowance is given per ton of carbon or an equivalent heat trapping gas. The total amount of allowances will be equal to the cap. A company or utility may only emit as much carbon as it has allowances for.

The “trade” allows a company to trade their excess allowance for money. While for some companies meeting the annual cap is easy, most of the companies find it difficult. For those companies, trading is introduced.

This provides a powerful incentive for creativity, energy conservation and investment — companies can turn pollution cuts into dollars. Through this trading process, the total Greenhouse gas emission cap is maintained, as those that exceed their cap can take some from companies having a surplus in their allowance.

Each year the cap is reduces on a gradual and predictable schedule. This leads to less and less air pollution each year and thus slowly global warming is prevented. This also leads to innovation and research on tools that emit less greenhouse gases and pushes companies to utilize more renewable sources of energy. Since companies that can meet their caps earn money by selling their surplus, most companies are trying their best to meet their cap for the financial