Cap-and-Trade

Cap-and-Trade
Name	Cap-and-Trade
Type	Market-based environmental policy
Purpose	Reduce emissions of pollutants such as greenhouse gass
Origin	Emissions trading concepts; modern schemes from United Kingdom and United States experiments

Cap-and-Trade is a market-based environmental policy that assigns a quantitative limit on emissions and creates transferable allowances to meet that limit. The system combines regulatory instruments with market mechanisms developed in schemes operated by entities like European Union institutions, California Air Resources Board, and programs influenced by negotiations such as the Kyoto Protocol and the Paris Agreement. Proponents cite economic efficiency drawn from models associated with Arthur Pigou, Ronald Coase, and practices observed in programs run by European Commission and Environmental Protection Agency.

Overview

Cap-and-trade sets a cap on aggregate emissions and allocates tradable permits among emitters, a design appearing in regions managed by European Union Emissions Trading System, Regional Greenhouse Gas Initiative, and California Cap-and-Trade Program. The conceptual roots connect to work by John Dales and policy instruments applied in the United Kingdom's sulfur programs, later adapted in initiatives influenced by diplomatic outcomes like United Nations Framework Convention on Climate Change conferences, including sessions in Copenhagen and Rio de Janeiro. Administrators such as European Commission officials and regulators from California Air Resources Board supervise market integrity, while legal frameworks reference statutes shaped by legislators in bodies like the United States Congress and assemblies such as California State Legislature.

Mechanism and Market Design

Design features include cap setting, allowance allocation, compliance periods, banking and borrowing rules, and offset protocols seen in programs administered by European Union Emissions Trading System administrators and modeled after instruments designed by advisors from institutions like the World Bank and Organisation for Economic Co-operation and Development. Allocation methods range from auctioning used by California Air Resources Board and European Commission to grandfathering employed in earlier phases influenced by policymakers in United States states and provinces including Quebec and British Columbia. Market infrastructure relies on registries and exchanges such as those operated in financial centers like London, Chicago, and New York City and oversight by regulators drawing on expertise from organizations like the International Monetary Fund and Securities and Exchange Commission. Compliance flexibility arises through trading among firms including utilities like Pacific Gas and Electric Company and industrial firms influenced by corporate strategies at companies such as Shell plc and BP.

Economic Effects and Environmental Outcomes

Empirical evaluations compare outcomes across programs implemented by European Union Emissions Trading System, Regional Greenhouse Gas Initiative, and California Cap-and-Trade Program, with analyses published by research centers at institutions like Massachusetts Institute of Technology, Stanford University, and University of California, Berkeley. Studies assess price signals affecting markets including the New York Stock Exchange and commodity markets influenced by firms such as ExxonMobil and Chevron Corporation; they investigate emissions reductions verified by agencies such as the Environmental Protection Agency and monitoring bodies connected to the Intergovernmental Panel on Climate Change. Economic modeling draws on frameworks from William Nordhaus and Nicholas Stern and empirical methods used by scholars at Harvard University and Princeton University to estimate welfare effects, distributional impacts, and innovation incentives reminiscent of historical shifts following policies like the Clean Air Act amendments.

Policy Implementation and Variants

Variants include cap-and-trade systems in the European Union and subnational programs in California, Quebec, and members of the Regional Greenhouse Gas Initiative. Alternative designs incorporate carbon taxes adopted by jurisdictions such as Sweden and British Columbia, hybrid approaches blending elements from instruments promoted by International Monetary Fund advisors, and sectoral trading systems discussed at United Nations Framework Convention on Climate Change meetings. Linkages among systems—such as the market linkage between California and Quebec—reflect international coordination efforts akin to negotiations at the United Nations and trade discussions involving blocs like the European Union.

Criticisms and Controversies

Critiques arise from debates involving politicians and analysts in arenas like the United States Congress, commentaries by think tanks including Heritage Foundation and Brookings Institution, and lawsuits before courts such as the Supreme Court of the United States. Controversies include allowance overallocation seen in early phases of the European Union Emissions Trading System, price volatility highlighted in analyses by economists at London School of Economics, concerns about offset integrity raised by non-governmental organizations such as Greenpeace and World Wildlife Fund, and distributional equity disputes debated in state legislatures like the California State Legislature and provincial assemblies in Canada. Lobbying by industry groups such as U.S. Chamber of Commerce and legal challenges involving corporations including Royal Dutch Shell have shaped reforms and market adjustments.

Historical Examples and Case Studies

Notable implementations include the European Union Emissions Trading System launched in response to commitments under the Kyoto Protocol and reformed post-2013, the Regional Greenhouse Gas Initiative initiated by northeastern United States states, and the linked programs of California and Quebec established through legislation and administrative rulemaking involving entities like the California Air Resources Board and provincial ministries in Quebec. Precedents in sulfur trading trace to programs overseen following amendments to the Clean Air Act and implemented by agencies such as the Environmental Protection Agency. Case studies and evaluations have been produced by academic centers at Massachusetts Institute of Technology, Stanford University, Columbia University, and policy institutes including Resources for the Future and the World Bank.

Category:Environmental policy