Cap and trade is a type of environmental policy meant to reduce overall emissions of pollutants. It works by setting a “cap” on the amount of allowable emissions, and then granting or selling companies the right to emit a determined amount of pollutants. The amount of allowances set out is lower than the amount companies would be allowed if the policy were not in place. Companies that reduce their emissions beyond what they are allocated can then “trade” their excess emissions, allowing them to sell the extra allowances that they have. In this way, companies can balance their commitment to environmental interests with the need to stay profitable.
The concept of cap and trade has been around since the 1970s. The most recent implementation of this policy can be seen in the European Union Emissions Trading System (EU-ETS), which was established in 2003 and puts a cap on the amount of carbon dioxide that companies are allowed to emit. The policy was later adopted by the Canadian province of Quebec in 2013 and in California, along with a few other U.S. states, in 2015. The overarching goal of the policy is to incentivize companies to adopt cleaner practices, and so far, the EU-ETS has seen its emissions decrease significantly.
The Benefits of Cap and Trade
Cap and trade has a number of potential benefits for the environment. First and foremost, it encourages companies to take action to reduce their emissions and adopt cleaner practices. In turn, this should help to reduce overall levels of air pollution. It has also been argued that cap and trade can be more cost efficient than traditional “command and control” policies, such as specific regulations or taxes, since it allows companies to set their own goals and encourages them to choose cheaper means to meet those goals.
Ultimately, cap and trade is a potentially powerful tool for implementing environmental policies. It has the potential to effectively reduce air pollution and incentivize companies to make the switch to cleaner practices. As the policy becomes increasingly adopted around the world, it could be the key to reducing our global emissions and tackling climate change.