Carbon cap and trade is a system that allows governments to try to reduce carbon emissions in their own countries. It establishes a broad goal of reducing certain emissions, particularly carbon emissions, by limiting how much each company can emit in a given year. Those who exceed that limit may be fined or subject to other government sanctions, but they will be able to purchase credits from those who are not using their entire allotment.
Because carbon is seen as the primary target, the system is commonly referred to as cap and trade. It caps, as the name implies, but also allows for trades. The trading allows the government to avoid higher government fines while still meeting its goal of reducing overall carbon emissions. Companies would be able to sell their credits on a centralized system, making them almost like commodities. The system could work in a similar way to a stock or commodity exchange.
Carbon cap and trade is just one of the methods that have been proposed in recent years to encourage companies to reduce their greenhouse gas emissions. Another option is a carbon tax, which may or may not allow a certain level of emissions before imposing the tax. Politicians who don’t want to be accused of raising taxes or driving up energy costs may prefer the carbon cap and trade approach.
There are numerous advantages to the carbon cap and trade system. First, based on the credits issued, it gives the government a realistic estimate of how many emissions to expect. Second, it provides companies with a new revenue stream if they improve their efficiency. Third, it provides another option for companies that use more than their allotment.
There are also some criticisms of the carbon cap and trade system. Some believe that traders or speculators who aren’t interested in the credits for emission reduction purposes will simply sell them at a higher price, causing the market to inflate. It is also argued that the system will inevitably produce winners and losers, benefiting some while burdening others, with the costs ultimately falling on the consumer, particularly in the form of higher energy bills.
The carbon cap and trade system in Europe is cited by both supporters and opponents. For example, a 2008 report from the Massachusetts Institute of Technology declared it a success with no major issues, but the Competitive Enterprise Institute disagreed. The success or failure of any political issue is often determined by an individual’s own point of view.