Cap and trade is a government strategy to limit greenhouse gas emissions by capping the total amount companies can emit. Companies can trade carbon credits or allocations with those who have produced fewer emissions. The effectiveness of cap and trade is debated, with proponents arguing it is efficient and flexible, while opponents argue it interferes with the free market system and does not reduce overall emissions. An alternative is a carbon tax, but supporters of cap and trade argue it would not work.
Cap and trade, also known as emissions trading, is an environmental strategy that involves a government capping or limiting the total amount of greenhouse gases, especially carbon, that companies can legally emit. If a company releases more greenhouse gases into the atmosphere than the cap allows, that company can “trade” with companies that have produced fewer emissions and buy carbon credits or allocations. These credits are designed to give companies leeway so that cutting emissions doesn’t have to interfere with profitability and the free market system. Whether or not cap and trade is effective is a widely debated issue, and most likely will be until conclusive and positive results are demonstrated or until the idea is definitively debunked. There are, however, several pros and cons that politicians, economists, environmentalists, and other concerned individuals have expounded.
Emission credits can be distributed in two general ways: through auctions and through government-issued permits. The auctions are designed to reward environmental efficiency and innovation. Under the cap and trade system, companies that have reduced their emissions and are capped can auction off the legal right to use their unused emissions and thus keep the profits. Government-issued permits are essentially free emissions credits that governments can give companies at their discretion.
Proponents of cap and trade argue that it is an efficient way to reduce greenhouse gas emissions. Opponents of the scheme, however, make the counter-argument that cap and trade will not reduce overall emissions and that emission levels will effectively stagnate. That’s because the largest companies, which are often also the most polluted, can simply buy emissions credits and continue to emit greenhouse gases at the levels they’re used to.
Another thesis of cap and trade proponents is that the system is flexible and does not interfere with profit and the free market system. Opponents argue that it interferes, allowing investment bankers to derive fees from the carbon credit market. Further, opponents argue that government-issued credits are essentially cash handouts, and while they will likely help increase a company’s profitability, they will in no way encourage companies to reduce their emissions.
A suggested alternative to the cap and trade system is for governments to issue a tax on carbon emissions. This would theoretically force companies to reduce emissions, since buying the right to pollute more would not be an option. The money generated by the taxes could then be used for sustainable energy development and other environmental projects. Supporters of Cap and Trade argue that a carbon tax wouldn’t work, however, as wealthier companies can easily afford the tax and would continue to pollute as usual.
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