For administrative ease, programs tend to include only the largest sources of greenhouse gases in the economy. Target — What level of emissions reduction will be required and by when? For example, the annual allowance budget in California will be calculated to put the state on a path to meeting its target to cut emissions to levels, and target to cut emissions to 40 percent below levels.
Allowance Allocation — How will allowances be distributed? Governments can auction allowances, give them away for free to covered facilities, or some combination of the two. Auctioning generates revenue that can be used for climate or other purposes. Both banking and borrowing help avoid price spikes.
Borrowing, however, can create supply constraints in future years. Most programs allow banking but not borrowing. Compliance Periods — Must facilities surrender allowances every year or only every few years? Multi-year compliance periods can reduce price volatility. RGGI and California both use three-year compliance periods with partial annual surrender obligations. Offsets — Can companies use verified emissions reductions generated outside the cap to comply?
Offsets can lower the overall costs of meeting the cap. For instance, agricultural and forestry projects can often reduce emissions at lower cost than industrial facilities. To be effective, offset projects must undergo rigorous verification procedures to ensure that emissions are actually reduced, and that only one entity takes credit for the offset. Market Integrit y — How will market manipulation be avoided? A transparent, secure registry can track transactions and prevent theft and double counting of allowances.
In addition, most jurisdictions select independent experts to review transaction data and watch for fraud. Ultimately, the critical factor in reducing heat-trapping emissions is the strength of the economic signal.
A stronger carbon price will kick-start more growth in clean, renewable energy and will encourage adoption of greener practices. Both cap-and-trade programs and carbon taxes can work well as long as they are designed to provide a strong economic signal to switch to cleaner energy.
However, some differences exist. Cap-and-trade has one key environmental advantage over a carbon tax: It provides more certainty about the amount of emissions reductions that will result and little certainty about the price of emissions which is set by the emissions trading market.
A carbon tax provides certainty about the price but little certainty about the amount of emissions reductions. A carbon tax also has one key advantage: It is easier and quicker for governments to implement. A carbon tax can be very simple. It can rely on existing administrative structures for taxing fuels and can therefore be implemented in just a few months. In theory, the same applies to cap-and-trade systems, but in practice they tend to be much more complex.
More time is required to develop the necessary regulations, and they are more susceptible to lobbying and loopholes. Cap-and-trade also requires the establishment of an emissions trading market. Unite for bold climate action!
Always grounded in sound evidence, the David Suzuki Foundation empowers people to take action in their communities on the environmental challenges we collectively face. What can we help you find? Sorry, but your search returned no results. Try searching with different keywords. What is a carbon tax? Email Submit. You'd have to drive 2, miles, roughly the distance between New York and Las Vegas, to emit that much carbon dioxide. The government distributes the allowances to the companies, either for free or through an auction.
The cap typically declines over time, providing a growing incentive for industry and businesses to reduce their emissions more efficiently, while keeping production costs down. Companies that cut their pollution faster can sell allowances to companies that pollute more, or "bank" them for future use. This market — the "trade" part of cap and trade — gives companies flexibility.
It increases the pool of available capital to make reductions, encourages companies to cut pollution faster and rewards innovation. As companies use established techniques to lower emissions, such as adopting energy-efficient technology, entrepreneurs see opportunity.
Ever wonder why you don't hear about acid rain anymore? Thank cap and trade, which slashed levels of sulfur dioxide to solve the problem — at a fraction of the projected cost. A market-based approach like cap and trade allows countries to make more ambitious climate goals. Environmental enforcement officials, trained by EDF, conduct an on-site inspection at a factory in China.
China, the world's largest greenhouse gas emitter, launched the initial phase of a national carbon market in with help from EDF. The national program builds on pilot emissions trading systems, which have included elements of cap and trade and are already underway in seven cities and provinces in China.
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