Cap-and-trade

Definition

Cap-and-trade is an environmental policy tool designed to reduce greenhouse gas emissions by setting a limit, or cap, on the total amount of emissions that can be produced. Companies are issued emission permits, and if they reduce their emissions below the cap, they can sell their excess permits to other companies that are struggling to meet their limits. This creates a financial incentive for companies to invest in cleaner technologies and ultimately aims to lower overall air pollution levels.

5 Must Know Facts For Your Next Test

1. Cap-and-trade programs set a specific limit on total emissions and allow companies with low emissions to sell their extra allowances.
2. This system encourages businesses to innovate and find cost-effective ways to reduce their emissions, leading to cleaner air.
3. Cap-and-trade has been implemented in various regions around the world, including California's program and the European Union Emissions Trading System (EU ETS).
4. The effectiveness of cap-and-trade systems can depend on how caps are set and whether there are enough incentives for businesses to reduce emissions.
5. Critics argue that cap-and-trade can lead to market manipulation and may not address all sources of pollution adequately.

Review Questions

• How does cap-and-trade create financial incentives for companies to lower their emissions?
  • Cap-and-trade creates financial incentives by allowing companies that reduce their emissions below the set cap to sell their excess permits to other companies. This market-based approach encourages businesses to innovate and invest in cleaner technologies because they can profit from selling unused allowances. By making emission reductions economically beneficial, companies are more likely to take proactive steps toward reducing their overall environmental impact.
• Evaluate the strengths and weaknesses of implementing a cap-and-trade system as a method of controlling air pollution.
  • One strength of cap-and-trade systems is that they provide flexibility for businesses, allowing them to choose how to meet their emission targets in a cost-effective manner. This can lead to significant reductions in air pollution over time. However, weaknesses include the potential for market manipulation and the risk that some companies may simply purchase allowances rather than invest in actual emission reductions. Furthermore, if caps are set too high, the system may fail to incentivize meaningful changes in pollution levels.
• Synthesize the potential long-term impacts of cap-and-trade systems on air quality and public health.
  • In the long run, successful cap-and-trade systems can lead to significant improvements in air quality by effectively reducing greenhouse gas emissions. As industries adapt and adopt cleaner technologies, communities may experience lower rates of respiratory diseases and other health issues associated with poor air quality. Additionally, the financial motivation behind such programs can spur innovation in sustainable practices across various sectors, promoting a healthier environment. However, if not managed properly, these systems might not address all pollution sources or could disproportionately affect disadvantaged communities, necessitating careful monitoring and adjustments.

Related terms

Emissions Trading System: A market-based approach to controlling pollution by providing economic incentives for achieving reductions in the emissions of pollutants.

Greenhouse Gases: Gases that trap heat in the atmosphere, contributing to global warming and climate change; major types include carbon dioxide, methane, and nitrous oxide.

Carbon Credits: Permits that allow the holder to emit a certain amount of carbon dioxide or other greenhouse gases; one credit typically allows for the emission of one ton of carbon dioxide.