This post is by Mark MacLeod, director of special projects for the national climate campaign at Environmental Defense.
Cap-and-trade is the structure of most of the global warming bills being considered by Congress.
The "cap" is the cornerstone of the policy. It is an absolute, nationwide limit on global warming pollution. Congress would most likely establish a cap measured as billions of tons of carbon dioxide (or equivalent) released into the atmosphere each year. Over time, the cap would be lowered to cut emissions enough to avoid the worst consequences of global warming. (See our earlier series for more on how much we need to cut.)
The "trade" part is a market that creates powerful incentives for companies to reduce pollution, and provides flexibility in how companies can meet the limits.
Here's how it works:
- The government will create "allowances" that add up to the total emissions allowed under the cap.
- Every year, those subject to the cap must turn in allowances equal to their emissions for that year. These entities include power plants, manufacturers, and others who release large amounts of carbon dioxide. For the nation to meet the cap, entities will have to reduce emissions.
- If an entity reduces its emissions enough that it has more allowances than it needs, it can profit by selling the extra allowances. This gives them the incentive to reduce below what's mandated by the cap.
- If an entity finds it expensive to reduce its emissions, it can buy more allowances from those with extra ones. It can choose the cheapest way to comply with the limits.
The key advantage to a cap-and-trade system is that the more a company reduces its emissions, the more money it can either make or save. Across the whole economy, the most efficient ways to cut pollution will be put into practice most widely. Here's an example of how cap and trade played out in reducing sulfur pollution, and a detailed report [PDF] on the same example.
One limitation of cap-and-trade is that it should only be used only for certain kinds of pollution. Carbon dioxide travels quickly to the upper atmosphere, so we don't have to worry about reducing it in specific places close to the ground. This make it a good fit for cap-and-trade. Mercury emissions, in contrast, are frequently deposited near where they are emitted, creating hotspots. It's also a toxin that threatens people's health. So mercury is not suited to cap-and-trade.
If you have questions about how cap-and-trade programs work, please post them, and we'll do our best to answer!
Tomorrow, I'll build on this post to explain what a "safety valve" is, and why it doesn't provide any safety.