What is a cap-and-trade system?
Cap-and-trade regulatory schemes attempt to combine traditional regulatory tools with the power of market incentives. Unlike many other regulatory programs that prescribe technologies to lower pollution, cap-and-trade programs set a target level for pollution, commonly referred to as a cap, and allow the emitters to determine how to meet the cap. The cap is made up of allowances that permit the holder to emit a specified amount of pollution. Firms must hold allowances equal to the amount of emissions they produce to be in compliance. Once the cap is set and allowances are created and allocated, the flexibility of the market-based regulatory mechanism comes into play. Cap-and-trade programs allow regulated parties to buy and sell allowances as they see fit. Variation in emission levels and reduction costs among firms creates economic efficiency gains because the exchange of allowances is advantageous for both potential buyers and sellers, and compliance is generally achieved at a lower
Related Questions
- What is your position on the following measures that have been proposed to address global climate change—a cap-and-trade system, a carbon tax, increased fuel-economy standards, or research?
- What are the concerns about incorporating offsets into a cap-and-trade system?
- What are the benefits of incorporating offsets into a cap-and-trade system?
