Cap & Trade 101
W h at i s Cap & Trade?
Cap & Trade is a government program to
reduce carbon dioxide (CO2) emissions
A Cap & Trade program has two parts:
1. The Federal Cap
• A system placing a national Cap on carbon (CO2)
emissions from large facilities. Those facilities
are required to account for their emissions
through getting “carbon permits,” which they
receive through auction or allocation. The cap
decreases regularly, reducing the number of
permits and creating emissions reductions.
2. The Private Trading Market
• After buying carbon permits, facilities can Trade
those permits on a private market for profit. The
profit created by buying and selling permission to
pollute benefits private companies, not the
American public.
W h at i s the Purpose of Cap & Trade ?
Cap & Trade aims to reduce CO2 emissions and fight climate change. By placing a price
on CO2 emissions, the program tries to use the market to encourage polluters to shift
away from CO2-emitting fossil fuels and toward clean, renewable energy sources.
Glossary
Allocation – The act of the government giving carbon Carbon Dioxide- A naturally occurring gas that is emitted in
permits to polluters for free. unnaturally large amounts by human’s burning of fossil fuels
for our transportation, energy, and industries.
Auction – The sale of carbon permits to regulated
polluters for a price determined by industry-wide Carbon Permits – A legal and financial instrument that
bidding. designates (usually) 1 metric ton of carbon emissions.
Climate Change- The long-term, significant changes in Offsets – A financial measure of carbon reduction. In
our earth’s climate resulting from increased purchasing “offsets”, carbon-emitting companies pay other
greenhouse gases. Over the last 200 years, the companies to reduce their carbon emissions or to take steps to
increased emissions of greenhouse gases has been capture and store carbon through, for example, planting trees.
caused primarily by human industrial activities.
Trade – Once companies have purchased or received carbon
Cap- A legal limit on the total amount of pollution that permits, they can sell and purchase them on the private
can be emitted each year by facilities under the trading market. Companies that reduce their emissions can
program. The cap can be local, national, or profit off their excess permits and companies that cannot
international. reduce or need to expand can purchase additional permits.
Polluters Buy or Get Free Available Permits
A Cap in Set on CO2 Permits are Divided Up Permits Decrease Over Time
Emissions Permits are given out regularly. Permits expire yearly. As
Each facility is given
Some facilities are given their the emissions cap gets
The government sets an access to a set number of
permits for free (“allocation”), tighter, there are fewer
emissions cap based on permits, based on their permits and the price per
current national emission reported emissions. while others have to buy their
permits (“auction”). permit increases.
levels. Polluters must purchase
Revenue from auctioned permits Facilities have to emit less
Levels are determined by an enough permits to pay for or buy permits on the
can be returned to taxpayers
honor system of facilities their annual CO2 private market.
self-reporting emissions emissions
I emit 23 tons ___ Factory A
Cap on carbon
A of CO2 emissions 23 tons CO2= 23 permits
CO2 emissions
without cap ___ Factory B
I emit 40 tons
of CO2 40 tons CO2 = 40 permits
B
___ Factory C
I emit 30 30 tons CO2 = 30 permits
tons of CO2
C CO2
___ Factory D
I emit 7 tons emissions 7 tons CO2 = 7 permits
with a cap
of CO2
D
A Private Trading
Market created for CO2
Reasons Facilities Have to Trading permits
Permits Reasons Facilities Have Buy Permits creates private profit
The private market is only to Sell Permits A facility will need extra permits for facilities
open to entities that have A facility will have extra if it emits more CO2 than it was Permit prices on the private
received CO2 permits. permits if it emits less CO2 given permits to cover. market are not regulated
Permits are sold by facilities than it was given permits to and will depend on market
Facilities may have increased
that have excess permits, and cover. supply and demand.
CO2 pollution because of
purchased by facilities that Facilities can reduce their increased production. The money made selling
did not receive enough CO2 emissions through
For older, dirtier facilities buying permits on the market
permits from the government reducing production or by
extra permits is likely to be creates profit for polluting
auction to cover their putting in place efficiency or
cheaper than cleaning up their facilities and does not
emissions. pollution-control measures.
plants. benefit the public.
Reduces emissions. Increases emissions. Reduces emissions.
Can sell 10 permits. Needs to buy 20 permits. Reduces emissions. Can sell 3 permits.
Now has 13 permits Now has 60 permits Can sell 7 permits. Now has 4 permits
Now has 23 permits
A D
B C
+ 10
+7
+3
Provided by:
The Environmental Justice Leadership Forum on Climate Change