What is Cap and Trade?

Tue, Dec 2, 2008

Green Energy


Cap and Trade is a market-based climate strategy for reducing greenhouse gas emissions. The environmental regulator establishes an aggressive limit or cap on the amount of emissions from a group of polluters such as power plants. The amount of cap is then divided into individual permits or allowances in terms of tons of carbon. Companies have to reduce emissions and meet the allowed permit. Those who cannot can buy permits from those companies who successfully reduce emissions.

Design features

A well designed cap and trade program may have the following features:

  • strict limits on emissions for pollution reduction
  • fixed number of allowances or permits for each polluter
  • incentives for pollution reduction
  • high standards of compliance and transparency
  • compatibility with local programs
  • flexibility for polluters to decide when, where and how to reduce emissions
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