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What is Carbon Cap and Trade?

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  • Written By: Ken Black
  • Edited By: Andrew Jones
  • Last Modified Date: 11 August 2018
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    Conjecture Corporation
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Carbon cap and trade is a system by which governments can seek to limit the carbon emissions produced in their respective countries. It sets an overall goal of reducing certain emissions, especially carbon, by allowing individual companies to only emit so much in a given year. Those who go beyond that amount may be fined, or face other government-imposed sanctions, but they would also be able to buy credits from others who are not using their entire allotments.

Often simply referred to as cap and trade, because carbon is understood to be the main target, the system caps, as it suggests, but also allows for trades. The trading creates an opportunity to avoid higher government fines, but still allows the government to meet its goal of lowering overall carbon emissions. It is envisioned that companies would be able to put their credits up for sale on a centralized system, where they would become almost like commodities. The system may operate similarly to a stock or commodity market.

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The practice of using carbon cap and trade to encourage companies to reduce their greenhouse gas emissions is just one of the methods that have been suggested in recent years. Another is a carbon tax, which may or may not allow a certain amount of emissions before the tax is imposed. Politicians who do not want to be accused of raising taxes or causing energy bills to increase may prefer the carbon cap and trade method.

The benefits to the carbon cap and trade system are numerous. First, it provides the government with a realistic goal of how many emissions to expect, based on the credits issued. Second, it provides companies with another revenue stream in the event they can become more efficient. Third, it gives those companies using more than their allotment another option.

The carbon cap and trade system also has some criticisms. Some believe that traders or speculators not interested in the credits for emission purposes may simply sell them at a higher value, which will inflate the market. It is also argued the system will naturally create winners and losers, being a financial benefit to some and a burden to others, with the costs ultimately reaching the consumer, especially in the form of higher energy bills.

Both supporters and opponents point to the carbon cap and trade system in Europe. For example, a report from the Massachusetts Institute of Technology in 2008 called it a success without any major problems, but the Competitive Enterprise Institute came to the opposite conclusion. As with all political issues, the success or lack thereof often depends on an individual's own viewpoint.

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