Cap and Trade: One Solution to Climate Change

Cap and Trade: One Solution to Climate Change

The threat of climate change in recent years is recognized as a real and potentially catastrophic threat to the health and welfare of our planet, as industrialized nations continue to run their economies by burning carbon into the atmosphere. Recently, it has taken on a larger role in our national media, the public, and the government, as the effects of anthropogenic climate change become more evident. In the United States, for example, the year 2007 brought the first major piece of legislation in the country to address the problem under the Climate Security Act, and the United States Supreme Court ruled that the U.S. Environmental Protection Agency had authority to regulate carbon dioxide as a pollutant. Today, many politicians, economists, scientists, and environmentalists propose a solution that would create a regulated market based on emissions into the atmosphere, effectively internalizing all negative externalities. It’s called cap and trade, and it has a lot of potential to help incentivize the implementation of alternative forms of energy, has several different variations and alternatives, and has already been successful in many programs around the world.

Implications of Cap and Trade

The “cap” of cap and trade is when government enforces a cap on emissions, which gradually gets smaller over time. The “trade” of cap and trade is enabling the free market to trade emissions permits, which can either be earned, bought, or given away. In order to reduce pollution, the government sets a cap on emissions and creates allowances to level off the cap. Sources are then free to buy, sell, or bank the allowances to use in future years. They can buy emissions credits when they need mor...

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