Cap and Trade


This post is part of our definitions series on “eco-lingo” and technical terms.

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photo credit: David Iliff, Wikimedia Commons

Cap and Trade (C&T) is also known as “pollution credits” or “emissions trading”. The basic premise of C&T is to provide a means for reaching mandatory pollution reduction targets in an incremental (and thus cost-saving) fashion. In a cap and trade system model, a regulatory entity (typically a governmental body) will assign a limit to the amount of pollution that certain high-impact industries can emit. High polluters can then essentially raise the ceiling on their allowable limits by engaging in a specialized market activity, i.e., buying shares or credits from those others who operate below their allowable limits. The regulatory limits are the “cap” and the market activity is the “trade”.

C&T activity is thus designed to reward those industries and companies that are aggressively exceeding their environmental performance goals, while charging a premium to those who do not stay within their assignations (because they have to purchase credits to make up for their overage). The idea is that purchasing pollution credits will literally buy time for polluters to clean up their act, and indeed a C&T program may include “caps” that step down over time to meet tighter standards.

While C&T is not limited to “greenhouse gas emissions” or carbon dioxide, the specialized trading done around these types of pollutants is one common example, and is referred to as a carbon market. Global carbon markets have taken off hugely among European and other nations that have signed the Kyoto Protocol (adopted in 1997, in force as of 2005) pledging targeted reductions in greenhouse gas emissions.

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What exactly does “sustainability” mean? How about “green”, “eco” or “environmentally friendly”? The truth is that these terms are just vague enough to mean many different things to many different people. With the staggering array of “green” products, ‘lifestyles’ and concepts being promoted by marketers and environmentalists alike (as well as the necessary coining of new terms to match new ideas) our definition series aims to make sense of the rising tide of “eco-lingo” and technical terms.

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