Cap-and-Trade Systems

What is a Cap-and-Trade System?

A Cap-and-Trade System is a market-based approach to controlling pollution by providing economic incentives for businesses to reduce emissions. The government sets an emissions cap, and issues a quantity of emission allowances consistent with that cap, through the use of carbon credits. Emitters must hold allowances for every ton of greenhouse gas they emit. Companies can buy and sell allowances in a carbon market, and this establishes an emissions price.

If a company reduces its emissions below its required allowance level, it can sell its unused allowances to other companies. If a company exceeds its allowable level, it can purchase additional allowances from other companies or from the government. A carbon offset is a reduction in emissions achieved outside of the regulated carbon market. For example, a company might plant trees to offset carbon dioxide emissions from its factories.

California Cap-and-Trade Program

The California Cap-and-Trade Program is one of the most important initiatives in the United States for reducing greenhouse gas emissions. The program allows entities covered by the cap to satisfy a portion of their regulatory obligations by buying and surrendering carbon credits generated by GHG reduction projects applying an Air Resources Board (ARB) Compliance Offset Protocol. These credits can provide businesses subject to California’s emissions cap a cost-effective way to meet their regulatory obligations and help reduce GHG emissions.

With the implementation of its cap-and-trade program, California stands as an international leader in the effort to reduce greenhouse gas (GHG) emissions. An important component of the Golden State’s system is the  Compliance Offset Program, which allows entities covered by the cap to satisfy a portion (up to 8%) of their regulatory obligations by buying and surrendering carbon credits generated by GHG reduction projects applying an Air Resources Board (ARB) Compliance Offset Protocol. These credits can provide businesses subject to California’s emissions cap a cost-effective way to meet their regulatory obligations and help reduce GHG emissions.

The compliance offset program is one of the most important aspects of California’s cap-and-trade program because it allows entities covered by the cap to reduce their greenhouse gas emissions at a lower cost. The program has been extremely successful in helping businesses reduce their emissions, and California’s cap-and-trade program is a model for other states and countries looking to reduce their greenhouse gas emissions.

Other cap-and-trade systems include the European Union Emissions Trading Scheme and the Regional Greenhouse Gas Initiative in the northeastern United States.

European Union Emissions Trading Scheme

Carbon credits cap-and-trade
Factory Pollution (Source: Unsplash)

European Union Emissions Trading Scheme is the largest carbon market in the world. The scheme covers more than 11,000 power stations and industrial plants in 31 countries, and nearly half of all carbon emissions in Europe. The scheme has allowed for a reduction of carbon emissions by more than 500 million tons, and it has raised billions of dollars in revenue.

Regional Greenhouse Gas Initiative

The Regional Greenhouse Gas Initiative was the first mandatory carbon cap-and-trade program in the United States. The initiative is a regional collaboration between nine northeastern U.S. states to reduce greenhouse gas emissions from the power sector. The initiative has been successful in reducing greenhouse gas emissions by more than 30% from 2005 levels.

Western Climate Initiative

The Western Climate Initiative is a carbon cap-and-trade program that covers a majority of the Western Hemisphere. The initiative is made up of seven U.S. states, four Canadian provinces, and five Mexican states. The program has been successful in reducing greenhouse gas emissions by more than 15% from 2005 levels.

China Certified Emission Reduction

The China Certified Emission Reduction (CCER) scheme is a carbon offset scheme in China that allows entities to generate carbon credits by reducing greenhouse gas emissions. The scheme has been successful in reducing carbon emissions by more than 10 million tons. The scheme is currently the largest carbon offset scheme in the world.

China CCER carbon credit scheme.
Shanghai, China (Source: Unsplash)

In 2013, China launched seven regional pilot carbon trading schemes as part of its effort to develop a national carbon trading scheme. The pilot schemes have been successful in reducing carbon emissions by more than 11 million tons.

South Korea’s Greenhouse Gas Reduction Trading Scheme

South Korea’s Greenhouse Gas Reduction Trading Scheme is the country’s first carbon market. The scheme was launched in 2015 and covers more than 600 entities, including power stations, factories, and airlines. The scheme has been successful in reducing carbon emissions by more than 10% from business-as-usual levels.

Japan’s Carbon Emissions Trading Scheme

In 2013, Japan launched its carbon emissions trading scheme. The scheme covers over 1,400 entities, including power stations, factories, and municipalities. The scheme has been successful in reducing carbon emissions by more than 5% from business-as-usual levels.

Tokyo Metropolitan Greenhouse Gas Reduction Procurement Scheme

The Tokyo Metropolitan Greenhouse Gas Reduction Procurement Scheme is a carbon offset scheme in Japan that allows entities to generate carbon credits by reducing greenhouse gas emissions. The scheme has been successful in reducing carbon emissions by more than 1 million tons.

There are several advantages to using a Cap-and-Trade System:

1) A Cap-and-Trade System can help reduce greenhouse gas emissions at a lower cost than other approaches such as regulations or subsidies.

2) A Cap-and-Trade System can be easily adjusted to changing economic and environmental conditions.

3) A Cap-and-Trade System can be used to encourage innovation and reduce emissions from a wide range of sources.

4) A well-designed Cap-and-Trade System can be efficient and fair, while also providing certainty to businesses and investors.

However, there are also some disadvantages to using a Cap-and-Trade System:

1) A Cap-and-Trade System may be difficult to implement and enforce.

2) A Cap-and-Trade System may be vulnerable to fraud and carbon leakage.

3) A Cap-and-Trade System may cause economic hardship for businesses and consumers.

Nonetheless, Cap-and-trade systems are important tools for reducing greenhouse gas emissions.

Voluntary Carbon Offsets

Wind turbines for carbon offset cap-and-trade projects.
Wind Turbine (Source: Unsplash)

A carbon offset is a reduction in emissions achieved outside of the regulated carbon market. For example, a company might plant trees to offset carbon dioxide emissions from its factories. Voluntary carbon offsets are carbon offsets that are not required by law, but instead are purchased by companies or individuals to offset their emissions.

Carbon offsets can be generated in a number of ways, including:

1) Preservation of forests and other carbon-rich ecosystems.

2) Reduction of methane emissions from landfill sites.

3) Capture and destruction of greenhouse gases from industrial processes.

4) Increase in energy efficiency.

5) Use of renewable energy sources.

6) Replacement of high-emitting vehicles with low-emitting vehicles.

7) Sustainable agriculture practices, such as those that reduce the amount of fertilizer used or prevent deforestation.

8) Wind power projects.

9) Solar power projects.

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