Cap and Trade Rules
Cap and Trade 101

Center for American Progress
January 16, 2008

What Is Cap and Trade, and How Can We Implement It Successfully?

The goal: To steadily reduce carbon dioxide and other greenhouse gas emissions
economy-wide in a cost-effective manner.

The cap: Each large-scale emitter, or company, will have a limit on the amount
of greenhouse gas that it can emit. The firm must have an “emissions permit” for
every ton of carbon dioxide it releases into the atmosphere. These permits set
an enforceable limit, or cap, on the amount of greenhouse gas pollution that the
company is allowed to emit. Over time, the limits become stricter, allowing less
and less pollution, until the ultimate reduction goal is met. This is similar to
the cap and trade program enacted by the Clean Air Act of 1990, which reduced
the sulfur emissions that cause acid rain, and it met the goals at a much lower
cost than industry or government predicted.

The trade: It will be relatively cheaper or easier for some companies to reduce
their emissions below their required limit than others. These more efficient
companies, who emit less than their allowance, can sell their extra permits to
companies that are not able to make reductions as easily. This creates a system
that guarantees a set level of overall reductions, while rewarding the most
efficient companies and ensuring that the cap can be met at the lowest possible
cost to the economy.

The profits: If the federal government auctions the emissions permits to the
companies required to reduce their emissions, it would create a large and
dependable revenue stream. These financial resources could be used to achieve
critical public policy objectives related to climate change mitigation and
economic development. The federal government can also choose to “grandfather”
allowances to the polluting firms by handing them out free based on historic or
projected emissions. This would give the most benefits to those companies with
higher baseline emissions that have historically done the least to reduce their pollution.

What Would a Successful Cap-and-Trade Program Look Like?
The goal: To limit the rise in global temperature to approximately 2.0 degrees
Celsius (3.6 degrees Fahrenheit) above pre-industrial levels by 2050 by reducing
carbon dioxide and other emissions from companies as part of a larger plan for
curbing global warming.

The cap: To achieve this goal, the U.S. government should steadily tighten the
cap until emissions are reduced to 80 percent below 1990 levels by 2050.
Businesses would have to obtain permits entitling them to emit a certain
quantity of carbon dioxide or its equivalent in other greenhouse gases. All
permits would be auctioned off by the government. Emissions permits in the near
term would likely fall in the range of $10 to $15 per metric ton of carbon
dioxide or its equivalent.

The trade: Companies unable to meet their emissions quotas could purchase
allowances from other companies that have acquired more permits than they need
to account for their emissions. The cost of buying and selling these credits
would be determined by the marketplace, which over time would reduce the cost of
trading the credits as trading becomes more widespread and efficient.

The profits: Initial estimates by the Congressional Budget Office project that
an economy-wide cap-and-trade program would generate at least $50 billion per
year, but could reach up to $300 billion. Approximately 10 percent of this
revenue should be allocated to help offset costs to businesses and shareholders
of affected industries. Of the remaining revenue, approximately half should be
devoted to help offset any energy price increases for low- and middle-income
Americans that may occur as a result of the transition to more efficient energy
sources. The other half of the remaining revenue should be used to invest in
renewable energy, efficiency, low-carbon transportation technologies,
green-collar job training, and the transition to a low-carbon economy. Some
resources should also be invested in the energy, environment, and infrastructure
sectors in developing nations to alleviate energy poverty with low-carbon energy
systems and help these nations adapt to the inevitable effects of global
warming. Revenues from the permit auction would essentially be “recycled” back
into the economy to facilitate the transition to an efficient, low-carbon energy
economy and ensure that consumers are not unduly burdened by potentially higher energy costs.


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