Cap and Trade 101

  • Published on February 29th, 2016

A cap is a limit on pollution defined by a government: so a government legally defines how much of a pollutant companies can produce. If they produce more, they have to pay fines. The polluting companies are assigned credits by the government as well. If they are polluting too much and won’t stop, they can buy credits from companies that are not polluting as much. This activity is the trade part of cap and trade.


In effect, cap and trade is an economic market in pollution, which allows the least-polluting companies to sell their credits to the biggest polluters, so the least polluting can make some money.

Cap and trade typically refers to carbon, because the target of reducing it to 350 parts per million has been established as a key one that would be effective in reducing climate change impacts. In order to achieve this target, the US would have to reduce its emissions by about 80% in 34 years.

A global cap on carbon emissions has been suggested as a way of creating an international cap and trade market worth trillions of dollars each year.

However, critics have noticed that some of the financial players that want to create the global market were also linked to the subprime mortgage meltdown and the dot-com bust.

The thing is, cap and trade is not new. It was developed first to reduce sulfur dioxide and fertilizer pollution (to cut acid rain), and it worked:

“Beginning in 1995 and over the subsequent decade, the SO2 allowance-trading program performed exceptionally well along all relevant dimensions. (Early assessments of the system’s design and performance were provided by Schmalensee et al 1998 and Stavins 1998.) The program was environmentally effective, with SO2 emissions from electric power plants decreasing 36 percent – from 15.9 million to 10.2 million tons – between 1990 and 2004 (U.S. Environmental Protection Agency 2011b), even though electricity generation from coal-fired power plants increased 25 percent over the same period (U.S. Energy Information Administration 2011). The program’s long-term goal of reducing annual nationwide utility emissions to 8.95 million tons was achieved in 2007, and by 2010 emissions had declined further, to 5.1 million tons. Overall, the program delivered emissions reductions more quickly than expected, as utilities took advantage of the possibility of banking allowances. With its $2,000/ton statutory fine for any emissions exceeding allowance holdings (and continuous emissions monitoring), compliance was nearly 100 percent.”

One idea for the carbon cap and trade system proposes to give free polluting permits to some industrial companies. This approach was attempted in Europe, but carbon emissions increased and the companies that received them made billions of dollars. Increasing profits for additional carbon pollution is obviously not the desired result. Additionally, energy prices fluctuated in Europe and sometimes increased.

Another potentially ineffective idea that might create more profits for companies but not reduce carbon is offsetting. Companies that reduced carbon by sequestering it could get permits for doing so, and then sell them to carbon polluters. The problem is it is difficult for any kind of oversight on the carbon sequestration process. How can you scientifically verify that a company did in fact sequester exactly the amount of carbon they claimed to have? Some companies might report to have sequestered a certain amount of carbon, but only actually did so with half of it, and some might cheat entirely.

Who would check up on their activities and would it even be feasible to do so? Another cheating scenario would be if a carbon polluter said it was planning to expand, but did not in order to get the offsetting permits. It might have had no true intention of expanding, but only said so to get the lucrative permits which it could sell to a big polluter, resulting in cash for the dishonest company and the allowance of more carbon emissions by the major polluter.

The other major problem is that we humans spend so much time debating cap and trade that it seems as if they are no other ideas, platforms, or strategies. In fact, innovation in clean and renewable energy, energy storage, and electric cars has grown remarkably just in the last 10 years. Also, the costs of these technologies has decreased and is poised to become even more affordable. None of them require the use of fossil fuels, so carbon emissions will decrease without any cap and trade scheme in place.

Cap and trade is more about industrial pollution, however. The cost of electricity production from renewable sources has already reached some degree of parity with fossil fuels, though, and one of the greatest sources of carbon emissions is coal power plants. These energy dinosaurs eventually will be replaced by solar, wind, geothermal, biomass, hydro, and perhaps nuclear.

Another aspect of this carbon pollution problem is the huge influence that the biggest polluters and profiteers have on politicians and public policy. So, a carbon cap and trade system that benefits some polluters by allowing them to continue to pollute and to make money is desirable by industrial polluters, but the impact on the planet and society is very negative.

When clean, renewable energy replaces more coal and petroleum, the political landscape will have to change. Lobbyists will have less influence to float platforms and systems that benefit huge companies and not the environment or human society.

In the United States, the Clean Air Act was born out very unhealthy living and working conditions which were created in an area with steel mills, southeast of Pittsburgh. In 1948, 20 Americans died and 7,000 were made sick during an inversion that trapped the air pollution over the town of Donora.

Unfortunately, there are many such incidents in American history and in other countries, some were worse. In 1952, a similar situation in London killed about 4,000 people.

Carbon pollution doesn’t kill people directly in the way other pollutants do, but it contributes to climate change and rising oceans could submerge islands nations causing trillions of dollars of damage and make whole human populations have to move.

Climate change could destroy cocoa farms in West Africa as well as other forms of agriculture around the world.

It also is linked to extreme weather events which cause damage to infrastructure and property and cost great amounts of money.

In fact, global heating completely threatens human livability.

Should huge carbon polluters be trusted to participate in a system which might reduce carbon emissions but could result in more being produced, and provide opportunities for them to make money?

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