Cap and Trade 

Cap and trade, also known as emissions trading, is a market-based system for controlling carbon emissions and other forms of atmospheric pollution and is a system that provides economic incentives to achieve this. This is done by setting a cap, or an upper limit, on the amount of carbon emissions a given business or other organization may produce. It allows states, countries, businesses and companies, that have not used their full allowance of carbon emissions to “trade” them, which really means to sell them to organizations that have already reached their cap limit. Doing this still keeps carbon emissions within an entity’s agreement for their collective allotment of emissions even though individual parties within this entity may be over their allotment.

Participants of cap and trade offset programs typically do this to try to help to curb global warming and climate change.

Carbon Offsets

A carbon offset is a way for participants in programs that utilize this way of reducing and controlling emissions, to compensate for emissions of carbon dioxide and other greenhouse gases by “trading” money with other participants that are under their allotment of emissions. States, countries, businesses and other entities that are made up of large groups, often voluntarily participate in programs that allow for carbon offsets, in the interest of helping to lower and control global warming.

Carbon offsets are measured in tonnes of carbon dioxide-equivalent where one tonne of carbon offset represents the reduction of one tonne of carbon dioxide or an equal amount of another greenhouse gas.

There are two markets for carbon offsets, one is for larger, compliance programs such as the Kyoto Protocol and the EU Emission Trading Scheme whose members are made up of countries and states. The other is for a much smaller voluntary markets open to individuals, companies, governments, and other entities, to mitigate their own use of transportation and electricity energy that emits carbon dioxide and other greenhouse gases. An example of this kind of offset is an individual or company may purchase carbon offsets to compensate for greenhouse gas emissions caused by individuals travelling by air.

Cap and Trade Offsets

Cap and trade offset programs are often run by a central authority, such as as a governmental body that allocates or sells a limited number of permits that allow for specific quantities of specific pollutants to be discharged by a particular entity such as a state in the EU or the US, or a country in an international program such as the Paris Agreement.

These programs are often viewed as a more flexible environmental regulation compared to other more rigid command-and-control environmental regulations because cap and trad programs allow organizations to decide how their own organization can best meet policy needs rather than this being imposed on them.

Learn about climate and law related news with Climate Law in Our Hands.