Cap and trade

A tradable permit system is defined as quantity-based environmental policy instrument. The regulatory authority stipulates the allowable total amount of emissions (cap) and the right to emit becomes a tradable commodity. Under a cap-and-trade system, prices are allowed to fluctuate according to market forces. Thus, the price of emissions is established indirectly. Permits could be allocated to firms through auction or free allocation. 

California AB32 cap and trade GHG emissions Hydrogen-specific policies... 

There is talk about carbon tax and cap-and-trade schemes. Essentially, a carbon tax is a tax on the carbon content of fuels—effectively a tax on the C02 emissions from burning fossil fuels. Thus, carbon tax is shorthand for carbon dioxide tax or C02 tax. 

Neither carbon tax nor cap-and-trade are practiced as of today, and obviously practical details will have to be worked out. Both these approaches put a price on carbon, and will affect the economics of processes. 

Cap and Trade In an attempt to reduce carbon emissions by industries, some governments and analysts support a "cap and trade" system. First, an overall "cap" is placed, by government regulation, on total carbon emissions for particular companies and/or their industries. The "trade" part of cap and trade allows companies that operate efficiently on a carbon basis, and thereby emit a lower amount of carbon than law allows, to sell or trade the unused... 

IETA is a leading association in the carbon emissions cap and trade industry. It sponsors research, publications and conferences on a worldwide basis. 

The aim of emissions cap-and-trade is to secure emission reductions at the lowest possible overall cost the trading allows companies to seek emission reductions to meet the aggregate cap wherever and however it is cheapest to do so. Five principles underlie the practical economic impact of an emissions trading system applied to C02 ... 

The EU ETS is a cap-and-trade system based primarily on the free allocation of a fixed amount of emission allowances to a set of covered installations. Companies can either use these allowances to cover the emissions resulting from the production of these installations or sell them to other companies that need additional allowances (Reinaud, 2005). Hence, for a company using an emission allowance, this represents an opportunity cost, regardless of whether the allowances are allocated for free or purchased at an auction or market. Therefore, in principle and in line with economic theory, a company is expected to add the costs of C02 emission allowances to its other marginal (variable) costs when making (short-term) production or trading decisions, even if the allowances are granted for free (Burtraw et al., 2002, 2005 Reinaud, 2003). 

An important question is how the pass-through of C02 opportunity costs affects the profitability of power stations. A main purpose of the free allocation of emissions allowances under the US cap-and-trade programmes for S02 and NOx, as well as under the EU ETS for C02, is to obtain the political support of large emitters. Thus, the free allocation aims to ensure that the introduction of the ETS does not reduce the profitability of the eligible companies. 

Burtraw, D., Palmer, K., Kahn, D., 2005. Allocation of C02 Emissions Allowances in the Regional Greenhouse Gas Cap-and-Trade Program. RFF Discussion Papers 05-25. 

The remainder of this article is structured as follows. In Section 2 we describe the reference case, which mimics the results of an efficient cap-and-trade programme, and then discuss the distortions that result due to allocation to existing power stations. Section 3 deals with new entrants. Section 4 sets out some conclusions. 

Most of the US cap-and-trade programmes for S02 and NOx used such a one-off allocation. Given the larger value of C02 allowances, the novel experience with a C02 trading scheme and the iterative nature of the definition of national or regional targets, such a one-off allocation was not viable under the ETS. 

If the carbon price on the global "carbon market" settles at 41 per ton/ the value of the global carbon credits market would be over 200 billion, which is more than that of most commodities. It is argued that this trading will drive jobs to countries that do not limit carbon. The more industrialized nations emit more carbon and therefore the cap-and-trade approach would penalize them more. It is for this reason that the opponents of this approach call it "economic disarmament." The EPA in the United States estimated that a 2008 bill on cap-and-trade would have reduced the nation s GDP by about 2%. 

California is already capping emissions and is allowing trading of emission allotments, and a dozen northeastern states are copying these cap-and-trade strategies in order to reduce the emissions of their power and transportation industries. 

Another European initiative is to regulate airline emissions by charging a carbon tax for emissions that exceed the allowed limit. The cap-and-trade approach would allow airlines to buy or sell the difference between their actual emissions and the limit. Because of the resistance of the airlines and the lack of international standards, it will probably take years before such a system is implemented. 

A cap and trade mechanism where emitting industries are required to purchase permits for part or all of the carbon emissions. 

A mandatory cap on carbon emissions, for example, could be enforced by a requirement that suppliers and users of fossil fuels hold tradable rights for each ton of carbon they produced—the so-called cap and trade approach. This would have the effect of placing a price on carbon emissions that would eventually be included in the price of all goods and services. Environmentally benign technologies, like those based on hydrogen, would... 

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