Cap And Trade
Cap and trade is a common term for a government regulatory program designed to limit, or cap, the total level of emissions of certain chemicals, particularly carbon dioxide, as a result of industrial activity.Proponents of cap and trade argue that it is a palatable alternative to a carbon tax. Both measures are attempts to reduce environmental damage without causing undue economic hardship to the industry.
Emission Trading
Definition
Emission trading is a government regulatory program aimed at limiting or reducing the total emission levels of specific chemicals, especially carbon dioxide. Through this mechanism, the government sets a cap on emissions and allocates or auctions emission allowances to companies. Companies can trade these allowances in the market to meet their emission targets. Proponents believe this is a more flexible way to reduce emissions compared to a carbon tax.
Origin
The concept of emission trading originated in the early 1990s with the U.S. Acid Rain Program, which successfully reduced sulfur dioxide emissions through market mechanisms. This approach was later applied globally to reduce greenhouse gas emissions, particularly under the Kyoto Protocol framework.
Categories and Characteristics
Emission trading mainly falls into two categories: Cap-and-Trade and Baseline-and-Credit.
- Cap-and-Trade: The government sets an emission cap and allocates allowances to companies. Companies can meet their targets by reducing their own emissions or purchasing excess allowances from others.
- Baseline-and-Credit: Companies' emissions are compared to a baseline. Those exceeding the baseline need to purchase credits, while those below the baseline can sell their excess credits.
Specific Cases
Case 1: European Union Emission Trading System (EU ETS)
The EU ETS is one of the largest carbon markets in the world, covering sectors such as power, manufacturing, and aviation. By setting emission caps and gradually reducing allowances, the EU ETS has successfully driven emission reduction efforts among companies.
Case 2: China's National Carbon Market
China launched its national carbon market in 2021, covering the power sector. As the world's largest carbon emitter, China's carbon market aims to drive low-carbon transformation through market mechanisms and is expected to expand to more sectors in the future.
Common Questions
Question 1: How does emission trading differ from a carbon tax?
Emission trading controls emissions by setting a cap and allowing market trading, while a carbon tax directly taxes emissions. The former is more flexible, but the latter is simpler and more straightforward.
Question 2: How do companies deal with a shortage of allowances?
Companies can address a shortage of allowances by purchasing excess allowances from other companies or investing in emission reduction technologies.
