Cap-and-Trade

Also known as Emissions trading, cap-and-trade serves as an administrative approach to control pollution through giving economic incentives for acquiring reductions in the release of pollutants.

The central authority sets a cap or limit in the amount of pollutants which can be released. Emission permits are issued to companies or other groups who are required to have an equivalent number of credits or allowances that symbolise the right to release a certain amount. Such total amounts of credits and allowances must not exceed the cap. Those companies, whose emission allowance must increase, can buy credits from the companies which pollute less. Trade is the term given to the transfer of allowances. The buyer, in effect, is paying a charge because of polluting. In return, the seller is rewarded for reducing emissions.

There are many active trading programs in air pollutants, and European Union Emission Trading Scheme is the largest for greenhouse gases. Also, there is a national market in the US to lessen acid rain as well as many regional markets in nitrogen oxides.

Cap-and-trade indicates a market-based approach to stop pollution. The idea behind this system is to cost-effectively and steadily reduce greenhouse emissions or widespread pollution by establishing economic incentives for large-scale pollutants and not only regulatory requirements.

The system will place strict implementation limits on each power plant or company that emits big volumes of carbon dioxide to the atmosphere. These businesses will need an emission permit, and in time, the limits will become more restrictive and will allow less pollution in each stage, until the final goal is attained. Other companies will regard it less expensive and easier to lessen emissions below the needed limits.