What is Cap and Trade?

According to the Environmental Protection Agency (EPA), Cap and Trade is an environmental policy tool that delivers results by placing a mandatory cap on emissions while providing sources flexibility in how they comply. Successful cap and trade programs reward innovation, efficiency, and early action and provide strict environmental accountability without inhibiting economic growth.

In other words, it is a policy that is designed to restrict or lower the amount of greenhouse gases that are going into our atmosphere while at the same time supporting the free market.

In its white paper, “Cap and Trade 101” the Center for American Progress wrote, “Each large-scale emitter, or company, will have a limit on the amount of greenhouse gas that it can emit.”  It went on to say,  that the “trade” component of Cap and Trade would be accomplished by allowing “more efficient companies, who emit less than their allowance, can sell their extra permits to companies that are not able to make reductions as easily. This creates a system that guarantees a set level of overall reductions, while rewarding the most efficient companies and ensuring that the cap can be met at the lowest possible cost to the economy.”

The proposed carbon “cap and trade” program would require emitters of carbon to purchase credits for all the material they release into the atmosphere. The federal government doesn’t plan to continue to give away emission credits. The effect will be a rise in cost for burning fossil fuels as companies pass on their costs to consumers. Ideally, these costs will encourage greater investment in cleaner forms of energy, in energy conservation, and in the technology to sequester carbon. In the meantime, however, the federal government will gain a new source of revenue: the revenue gained from selling permission to emit carbon into the air. The price of this permission will depend, of course, on the demand for the available credits. Depending on one’s point of view, one can frame that source of revenue as a royalty on the exploitation of a valuable resource (the right to emit stuff into the air) or as a flexible tax (the value of which will be determined by the market for emission credits).

The featured video sheds some light on this policy, one which few of us understand but all of us will feel the impact of.

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