Answered By: Emilie Smart
Last Updated: Aug 29, 2015     Views: 25

Cap and trade is one method for regulating and ultimately reducing the amount of pollution emitted into the atmosphere. It is viewed as a more democratic solution to regulating pollution than a carbon tax as it creates a commodity out of the right to emit carbon and allows the commodity to be traded on the free market.

How Cap and Trade Works

The basic concept involves two parties, the governing body and the regulated companies or units emitting pollution. The government sets a cap on pollution, limiting the amount of carbon dioxide and other harmful output that companies, or other groups, are allowed to release. The government then issues credits which allow companies to pollute a certain amount, as long as the aggregate pollution equals less than the set cap.

Since some companies can reduce polluting emissions more inexpensively than other companies, they may engage in trading any extra permits. Companies that can more efficiently reduce pollution sell permits to companies that cannot easily afford to reduce pollution. The companies that sell the permits are rewarded while those that purchase permits must pay for their negative impact. Applied to climate change, this system would theoretically reduce carbon emissions at the lowest total cost.