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Understanding Cap-and-Trade: A Flexible Approach to Reducing Emissions

This article explores the cap-and-trade system, which aims to reduce greenhouse gas emissions through market-based solutions. Originally effective for acid rain, it offers certainty in emissions limits while providing flexibility for businesses. The overview includes how caps are set, the trading process of allowances, and the potential for offsets. Additionally, it discusses the implementation of cap-and-trade globally, its challenges like price volatility, and compliance mechanisms. The system's role in combating climate change and its future prospects are critically examined.

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Understanding Cap-and-Trade: A Flexible Approach to Reducing Emissions

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  1. Cap and Trade What is it? Ethan Elkind Bank of America Climate Change Research Fellow UC Berkeley/UCLA Schools of Law

  2. Why Cap-and-Trade? • Seemed to work with acid rain • Certainty of overall emissions • Flexibility for businesses (“free market environmentalism”) • Alternatives: regulation and carbon taxes • Happening around the world

  3. The Cap • Who falls under the cap? • Upstream vs. downstream sources • Limit on total emissions from regulated sources • Declining over time • Setting the cap: gather emissions data

  4. Allowances • Divide capped emissions into allowances • Allowances (or Credits) = right to pollute • Distributing: grandfathering vs. auction • Auction revenue: • dividend or investment • Price floor/ceiling

  5. Trading • Buying/selling allowances among sources • Seller: make more $ selling allowances than reducing emissions • Buyer: cheaper to buy than reduce emissions

  6. Tightening the Cap • Removing allowances: • Retire credits after compliance periods • Percentage removed per trade • Donation • Purchase & retire

  7. Offsets • Credits for carbon reductions by: • Unregulated sources • Agriculture/forestry sector carbon sequestration • Domestic (ag/forestry) or international (developing countries) • Additional, verifiable, quantifiable, real • Compliance and voluntary markets

  8. Are we experienced? • Acid Rain • RECLAIM • European Union • RGGI • Pending: • California (AB 32) • United States (Waxman-Markey) • Western Climate Initiative

  9. Common Challenges • Cap is too high • Price fluctuations • Market gaming • Windfall profits • Monitoring, enforcement, and verification

  10. www.legalplanet.wordpress.comEelkind@law.berkeley.edu

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