Cap And Trade

Cap And Trade

Cap and Trade is a market-based approach to controlling pollution by providing economic incentives for reducing the emissions of pollutants. In a Cap and Trade system, a central authority (usually a governmental body) sets a limit or cap on the amount of a pollutant that can be emitted. Companies or other groups are issued emission permits and are required to hold an equivalent number of allowances (or credits) which represent the right to emit a specific amount. The total amount of allowances and credits cannot exceed the cap, limiting total emissions to that level. Companies that need to increase their emission allowance must buy credits from those who pollute less. The transfer of allowances is referred to as a trade. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions. Thus, in theory, those who can reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest cost to society. Cap and Trade is often compared and contrasted with the alternative government policy of a pollution tax. While both are economic incentives, Cap and Trade is a quantity instrument (meaning it fixes the overall emission level and allows the price to vary), whereas a tax is a price instrument (meaning it fixes the price while the emission level is allowed to vary according to economic activity). There are active trading programs in several pollutants. For greenhouse gases, the largest is the European Union Emission Trading Scheme, which trades primarily in European Union Allowances (EUAs); the Kyoto Protocol has established a similar scheme. In the United States, there is a national market to reduce acid rain and several regional markets in nitrogen oxides. Markets for other pollutants tend to be smaller and more localized.

emissions, allowances, credits, pollutants, incentives, reduction, greenhouse gases, economic activity, trading programs

— Robert Anderson

CITATION : "Robert Anderson. 'Cap And Trade.' Design+Encyclopedia. https://design-encyclopedia.com/define/cap-and-trade?E=431457 (Accessed on October 14, 2026)"