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Cap and Trade

What does Cap and Trade mean?

A market-based policy tool to fight climate change. It is also known as carbon credit. Limits for greenhouse gas emissions is set. Companies which make less pollution or emissions get emission allowance or carbon credits for the unused portion of their limits. Carbon credits are traded on exchanges. Companies with high greenhouse gas emissions buy an emission allowance. In this way, overall impact on the environment is balanced.

Futures Knowledge Explains Cap and Trade

The cap-and-trade model of carbon pricing is working well in European Union. This model has been adopted by some provinces of United States and Canada such as California, Quebec and Ontario. Under a cap-and-trade program, ‘permits’ to pollute are traded and fees are levied. All revenue from cap and trade must, by law, be used to reduce greenhouse gas emissions. For example, when a power plant in California burns fuel and emits exhaust, the government gets money which can be used to install rooftop solar panels or put more clean vehicles on California roads.

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