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What is Cap and Trade?

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Authored by Kennedy Allen in Environment
Published on 10-10-2009

Cap and trade is the common term for emissions trading, which is an administrative approach to control pollution in the world by providing economic incentives to countries or companies for achieving reduced amounts of polluting emissions.

Cap and trade works when the government or other ruling party sets a limit to the amount of polluting emissions a nation or company can output into the environment. This emission “cap” needs to be met.

The cap is thought of as credits. Every participating party gets a certain amount of credits that they can use. One cannot go over their specified amount of credits, but can trade their credits to other parties. This trading can be economically better than using all the credits themselves, so it encourages the parties to only use the necessary credits instead of blowing though the entire allotted amount.

The credits each party gets equal the cap amount of emissions decided on by the administration. This can be the government or other controlling agency. The involved parties who know they will reduce their emissions can trade those extra credits with companies that use more than their allotted credits.

For example, if one party thinks that they will emit less than the amount of emissions already set as their cap limit, they may trade that excess amount to parties that offset more than their share of the cap limit for a cost. Cap and trade encourages companies and nations to pollute significantly less and turn to more efficient energy sources because of the possibility to make money from more inefficient companies.

Cap and trade encourages the race to “go green”. Companies that choose to turn to more environmentally friendly options are not only being encouraged by the potential for economic gain from their competitors, but from the increasing popularity and respect they will get from the population. Environmental concern and the green movement are growing in popularity, and consumers are more often than not going with the earth friendly alternatives.

The cap in cap and trade regulations is usually set at a historically low number for polluting emissions. This encourages companies and nations to really re-evaluate their current methods of emission production and makes them think of ways to effectively reduce these so they can eventually sell their extra credits to other companies who find it more difficult or are less willing to change their ways.

The cap and trade system works well by setting the limits of undesirable emissions being sent into the atmosphere each year. By controlling pollution in this way, it can be easier for scientists to keep track and possibly control the damage being done to the ozone layer.

Positive reinforcement like cap and trade is needed, especially for big companies who might find it easier to stay stuck in their ways than to move along with the times and become more environmentally conscious. With the cap and trade process in full swing and the public’s perception of environmental safety at an all time high, the world is well on its way to truly being a better place for a much longer time.

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