Cap and Trade
What is it?
Ethan ElkindBank of America Climate Change Research Fellow
UC Berkeley/UCLA Schools of Law
Why Cap-and-Trade?
• Seemed to work with acid rain
• Certainty of overall emissions
• Flexibility for businesses (“free market environmentalism”)
• Alternatives: regulation and carbon taxes
• Happening around the world
The Cap
• Who falls under the cap? • Upstream vs. downstream sources • Limit on total emissions from regulated sources• Declining over time• Setting the cap: gather emissions data
Allowances
• Divide capped emissions into allowances
• Allowances (or Credits) = right to pollute
• Distributing: grandfathering vs. auction
• Auction revenue: – dividend or investment– Price floor/ceiling
Trading
• Buying/selling allowances among sources• Seller: make more $ selling allowances than
reducing emissions• Buyer: cheaper to buy than reduce emissions
Tightening the Cap
• Removing allowances: – Retire credits after compliance periods– Percentage removed per trade– Donation– Purchase & retire
Offsets
• Credits for carbon reductions by:- Unregulated sources- Agriculture/forestry sector carbon sequestration
• Domestic (ag/forestry) or international (developing countries)
• Additional, verifiable, quantifiable, real• Compliance and voluntary markets
Are we experienced?
• Acid Rain• RECLAIM• European Union• RGGI
• Pending: – California (AB 32)– United States (Waxman-Markey)– Western Climate Initiative
Common Challenges
• Cap is too high
• Price fluctuations
• Market gaming
• Windfall profits
• Monitoring, enforcement, and verification
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