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What is a “cap-and-trade” program?
Generally speaking, a cap-and-trade program is a system that limits the availability of a given commodity and allows interested parties to bid for the limited supply.
How does cap-and-trade address climate change?
Under a cap-and-trade program designed to slow or prevent global climate change, greenhouse gas (GHG) emissions become the regulated commodity. By providing economic incentives for reducing the emission of GHGs, the cap-and-trade program is controlling the pollutants that lead to higher global temperatures.
How do companies participate in a climate cap-and-trade program?
Within a cap-and-trade system, the pollution that each company can emit is capped at a certain level. Let’s say that the government grants a given company 25 credits of emission permits. If the company consumes its pollution permits and needs to find more, it must buy them from other companies that have an excess of permits.
A company carries an excess of permits if it has lowered its emissions; it can then trade these excess permits for money. This transaction is the “trade” part of the equation: the buyer pays to pollute above its limit, while the seller is rewarded for having reduced emissions below its limit.
In theory, the companies that can reduce their emissions most cheaply will do so, achieving pollution reduction at the lowest possible cost to society. This is considered one of the advantages of a cap-and-trade program. The process minimizes the role of government, instead allowing private entities to determine the most cost-effective means of meeting the cap.
Why now?
By limiting the total amount of GHGs emitted by domestic companies, the U.S. would take a significant step toward stopping and reversing global climate change, a process that is projected to have a negative impact on the global economy over the next century and beyond - affecting harvests, the frequency of natural disasters and even population migration – while setting the foundation for a new, clean-energy economy.
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