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Glossary of Terms

Cap and Trade
A cap and trade emissions system is one of the policy options currently under discussion in the U.S. for implementing carbon regulation.

How it works: the U.S. government would set a cap on the total amount of carbon dioxide or other greenhouse gases that the entire nation is allowed to emit in one year. Ideally, the cap is also lowered over time, to give businesses a chance to adjust to restrictions and allow for improvement in technologies.

The government then issues or auctions permits to businesses, allowing them to emit a certain amount of those pollutants. The total amount of permits issued cannot exceed the cap. Businesses who don’t emit a lot of greenhouse gases could then trade (sell) their permits to businesses that do. Carbon credits could be traded as well.

The success of cap and trade depends on many things, but it especially matters where the initial cap is set. If it is not set low enough, then emissions are not reduced and business as usual continues while global warming and climate change are not significantly checked. It also matters whether all businesses are included in the cap and trade system, or whether grandfather clauses allow historically high carbon emitters (such as fossil fuel-based utilities) to escape meaningful regulation. Likewise, a cap and trade system sets up a carbon marketplace that requires extensive regulation and monitoring, and adequate funds must be allotted for enforcement.

How do you set a cap? Great question. An impending international treaty on carbon regulation and climate change is likely to play a role in these decisions. Currently, the IPCC has established the need to prevent the global average temperature from rising 2°C above pre-industrial levels. Temperature rise beyond this point runs extremely dangerous risks, such as total melting of polar ice sheets, sea level rise up to 40 feet, skyrocketing numbers of refugees, compromises to food systems, increased disease and insect vectors, etc.

To achieve this target, total GHGs in the atmosphere must remain at or below 450 parts per million. To meet its share of this goal, by 2050 the U.S. would have to reduce emissions by at least 80 percent below 2000 levels. Currently, U.S. emissions continue to grow. A cap and trade system would have to institute significant emissions reductions in order to make a meaningful difference.

Cap and trade is not the only carbon regulation trading policy option – there is also an option for a carbon tax.
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