Definition of Cap and Trade

What Is Cap and Trade?

A cap and trade system, also known as emission trading, consists of governmental policies and economic tools that try to control pollution. They set limits on the quantity of greenhouse gas emitted and provide credits as incentives in order to achieve set targets.

There are several mechanisms at work in an emissions trading scheme:

  • Cap: Large-scale emitters of greenhouse gases such as corporations are given limits in the form of emission permits for how much they can pump into the atmosphere. The total number of permits issued throughout any given region cannot exceed the overall cap for that system. The permits are usually issued in quantities equivalent to tons of carbon dioxide, which are slowly declining as limits become stricter over time.
  • Trade: Some entities will have an easier time staying within the limits of their emission permits. Efficient companies that produce fewer greenhouse gas emissions than they are allotted can sell their excess permits to other companies that need them. The cost for purchasing such permits is determined by the market.
  • Economics: Federal governments are expected to auction off emission permits. The revenue received through this process would then be used to help mitigate greenhouse gas emissions in other ways.

Serious debates are held by nations and governmental organizations over how to measure greenhouse gas emissions, what targets to set for their reduction, and how to monitor effective cap and trade systems. Many believe that we need to focus on the quantity of carbon dioxide in the atmosphere (in parts per million CO2), keeping it below 350 ppm – anything above that will mean widespread, uncontrollable climate change. [Unfortunately, the US NOAA reported in October 2010 that the concentration of carbon dioxide in the Earth's atmosphere has already reached 388 ppm by volume.][1] Others focus on the rise in temperature, arguing that we must not allow global temperatures to rise more than 2.0 degrees Celsius (3.6 degrees Fahrenheit) above pre-industrial levels by 2050. 

There are both pros and cons of cap and trade schemes:

  • Pros: This kind of system has proven to be highly effective in reducing other types of pollution (sulphur dioxide was reduced drastically to help battle acid rain in recent decades), so if used widely it could make a significant impact on climate change. It also has the potential to create billions of dollars of revenue that can be used to encourage greenhouse gas reductions in other ways.
  • Cons: Many fear that the costs of purchasing carbon permits will be passed along to the consumers. There are many solutions to this potential problem, including funneling the permit revenue back into the economy to help offset the burden on consumers.


1. Recent Global CO2. (2010, October). Retrieved October 25, 2010, from NOAA:
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