What was cap and trade

In carbon dioxide's case, the heat-trapping greenhouse gas mixes into the upper atmosphere and has a global effect. Reducing emissions locally lowers levels around the world. The total amount of the cap is split into allowances, each permitting a company to emit one ton of emissions. You'd have to drive 2, miles, roughly the distance between New York and Las Vegas, to emit that much carbon dioxide. The government distributes the allowances to the companies, either for free or through an auction.

The cap typically declines over time, providing a growing incentive for industry and businesses to reduce their emissions more efficiently, while keeping production costs down. Companies that cut their pollution faster can sell allowances to companies that pollute more, or "bank" them for future use.

This market — the "trade" part of cap and trade — gives companies flexibility. It increases the pool of available capital to make reductions, encourages companies to cut pollution faster and rewards innovation. As companies use established techniques to lower emissions, such as adopting energy-efficient technology, entrepreneurs see opportunity. State and Trends of Carbon Pricing World Bank, In a cap-and-trade system, the government sets an emissions cap and issues a quantity of emission allowances consistent with that cap.

Emitters must hold allowances for every ton of greenhouse gas they emit. Companies may buy and sell allowances, and this market establishes an emissions price. Companies that can reduce their emissions at a lower cost may sell any excess allowances for companies facing higher costs to buy. Beyond these basics, policymakers must consider a range of design choices that can influence the cost of compliance and the distribution of these costs in society. 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. 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. Target — What level of emissions reduction will be required and by when? She says she realized that "we had been talking past each other for months. EDF argued that a hard cap on emissions was the only way trading could work in the real world.

It wasn't just about doing what was right for the environment; it was basic marketplace economics. Only if the cap got smaller and smaller would it turn allowances into a precious commodity, and not just paper printed by the government. No cap meant no deal, said EDF. John Sununu, the White House chief of staff, was furious. He said the cap "was going to shut the economy down," Boyden Gray recalls.

But the in-house debate "went very, very fast. We didn't have time to fool around with it. But others say the White House was full of sports fans, and in basketball you aren't a player unless you score in double digits. Ten million tons just sounded better. Near the end of the intramural debate over the policy, one critical change took place. The EPA's previous experiments with emissions trading had faltered because they relied on a complicated system of permits and credits requiring frequent regulatory intervention.

Sometime in the spring of , a career EPA policy maker named Brian McLean proposed letting the market operate on its own. Get rid of all that bureaucratic apparatus, he suggested. Just measure emissions rigorously, with a device mounted on the back end of every power plant, and then make sure emissions numbers match up with allowances at the end of the year. It would be simple and provide unprecedented accountability. But it would also "radically disempower the regulators," says EDF's Joe Goffman, "and for McLean to come up with that idea and become a champion for it was heroic.

Oddly, the business community was the last holdout against the marketplace approach. Boyden Gray's hiking partner John Henry became a broker of emissions allowances and spent 18 months struggling to get utility executives to make the first purchase.

Initially it was like a church dance, another broker observed at the time, "with the boys on one side and the girls on another.

For instance, emitters are encouraged to design compliance programs to meet the emission reduction requirements. A compliance program typically includes the implementation of pollution controls and measures to increase energy efficiency. Alternatively, an emitter may sell their allowance to other emitters, who pay value for the right to emit.

When a price for emissions is set by a market, some emitters may choose to emit less than the amount authorized by their allowance. The market for allowances is a hallmark of cap-and-trade: it permits the overall distribution of emissions reduction efforts to accord with market forces. In a cap-and-trade program, no single firm has a maximum limit of emissions. Rather, the cap controls the aggregate emissions freeing emitters to buy and sell allowance based on supply and demand.