What is Cap and Trade?

In the context of Advanced Renewable Energy Initiatives of the Obama administration, Cap and Trade has come up a number of times. What exactly is it, and how would it work?

Emissions trading is an administrative approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. It is sometimes called cap and trade. The goal is to steadily reduce carbon dioxide and other greenhouse gas emissions economy-wide in a cost-effective manner.



The cap: Each large-scale emitter, or company, will have a limit on the amount of greenhouse gas that it can emit. The firm must have an “emissions permit” for every ton of carbon dioxide it releases into the atmosphere. These permits set an enforceable limit, or cap, on the amount of greenhouse gas pollution that the company is allowed to emit. 



The trade: It will be relatively cheaper or easier for some companies to reduce their emissions below their required limit than others. These more efficient companies, who emit less than their allowance, can sell their extra permits to companies that are not able to make reductions as easily. This creates a system that guarantees a set level of overall reductions, while rewarding the most efficient companies and ensuring that the cap can be met at the lowest possible cost to the economy. This would generate a revenue stream, some of which should be used to invest in renewable energy, efficiency, low-carbon transportation technologies, green-collar job training, and the transition to a low-carbon economy. Revenues from the permit auction would essentially be “recycled” back into the economy to facilitate the transition to an efficient, low-carbon energy economy.

The goal: To limit the rise in global temperature to approximately 2.0 degrees Celsius (3.6 degrees Fahrenheit) above pre-industrial levels by 2050 by reducing carbon dioxide and other emissions from companies as part of a larger plan for curbing global warming.