The best climate policy — environmentally and economically — limits emissions and puts a price on them. Cap and trade is one way to do both.
It’s a system designed to reduce pollution in our atmosphere.
The cap on greenhouse gas emissions that drive global warming is a firm limit on pollution. The cap gets stricter over time.
The trade part is a market for companies to buy and sell allowances that let them emit only a certain amount, as supply and demand set the price. Trading gives companies a strong incentive to save money by cutting emissions in the most cost-effective ways.
The government sets the cap across a given industry, or ideally the whole economy. It also decides the penalties for violations.
Carbon dioxide and related pollutants that drive global warming are main targets of such caps. Other pollutants that contribute to smog can also be capped.
In carbon dioxide's case, the heat-trapping greenhouse gas mixes into the upper atmosphere and has a global effect. Reducing emissions locally lowers levels around the world.
The total amount of the cap is split into allowances, each permitting a company to emit one ton of emissions. (You'd have to drive 2,400 miles, roughly the distance between New York and Las Vegas, to emit that much carbon dioxide.)
The government distributes the allowances to the companies, either for free or through an auction.
The cap typically declines over time, providing a growing incentive for industry and businesses to reduce their emissions more efficiently, while keeping production costs down.
Companies that cut their pollution faster can sell allowances to companies that pollute more, or "bank" them for future use.
This market — the "trade" part of cap and trade — gives companies flexibility. It increases the pool of available capital to make reductions, encourages companies to cut pollution faster and rewards innovation.
Cap and trade lets the market find the cheapest way to cut emissions.
Because there are only so many allowances available, total pollution drops as the cap falls.
As companies use established techniques to lower emissions, such as adopting energy-efficient technology, entrepreneurs see opportunity.
Ever wonder why you don't hear about acid rain anymore? Thank cap and trade, which slashed levels of sulfur dioxide to solve the problem — at a fraction of the projected cost.
A market-based approach like cap and trade allows countries to make more ambitious climate goals.
Environmental enforcement officials, trained by EDF, conduct an on-site inspection at a factory in China.
China, the world's largest greenhouse gas emitter, launched the initial phase of a national carbon market in 2017 with help from EDF.
The new emissions trading system is expected to be the world’s largest, dwarfing all existing programs, and is a central component of China’s strategy to tackle climate pollution.
The national program builds on pilot emissions trading systems, which have included elements of cap and trade and are already underway in seven cities and provinces in China.
They cover more than 2,600 companies in regions with a population of more than 258 million.
In the European Union's Emissions Trading System, capped emissions from stationary structures were 29% lower in 2018 than when the program started in 2005.
In the United States, California’s climate policies have led to a steady decline of the state's carbon dioxide pollution. The centerpiece is the cap-and-trade program, which EDF has helped design and implement.
California's emissions from sources subject to the cap declined 10% between the program’s launch in 2013 and 2018. Meanwhile, the state’s economy is thriving [PDF].
Cap and trade makes even deeper cuts possible when countries cooperate, such as the United States and Canada. California and Quebec connected their systems in 2014, building a strong market that shows great potential.
Every day more than 60 people sign up for news and alerts, to find out when their support helps most. Will you join them? (Read our privacy statement.)
$35
$50
By Alex Pfeifer-Rosenblum
Is California’s cap-and-trade program working?
It depends on where you live.
If you’re interested in reducing emissions statewide, it’s hard to argue that the program didn’t contribute to the state’s dramatic overall reduction in emissions. California recently achieved its goal of reducing emissions to 1990 levels four years early, achieving a 13% drop in emissions from 2004 to 2016 even amid a rapidly growing economy. While the state’s success can be attributed to multiple policies, including a Renewables Portfolio Standard and Low Carbon Fuel Standard, most experts agree that cap-and-trade contributed at least in part to the state’s success.
But a recent study found that cap-and-trade is contributing to increased local pollution, primarily in the areas that California’s pollution mapping tool (CalEnviroScreen) has identified as “disadvantaged communities.” Such communities – including parts of Los Angeles, Oakland, the Central Valley, and Inland Empire – face the highest pollution burdens in the state. Most are primarily low-income and serve as home to communities of color.
Under cap-and-trade, the state sets an overall cap on the level of carbon dioxide equivalent (CO2e) that facilities may emit. Many facilities are operated by large corporations, which determine the distribution of pollution allowances among their facilities. The study found that despite the statewide reduction in pollution since the implementation of cap-and-trade, most individual facilities have increased local pollution – and these facilities are disproportionately located in disadvantaged communities.
That’s because cap-and-trade offers a catch: companies can increase local pollution if they invest in “offsets,” projects leading to verifiable emissions reductions which are generally located outside of the community experiencing increased pollution, or even outside of California. The study found that facilities that have increased local pollution are indeed more likely to be owned by companies purchasing offsets.
To address these disparities, state legislators have relied primarily on the California Greenhouse Gas Reduction Fund, which directs a portion of cap-and-trade revenues to environmental projects in disadvantaged communities. Projects have ranged from community solar to affordable housing and sustainable transportation systems. While an important effort, these investments have failed to make a dent in the pollution burden faced by disadvantaged communities, as they have not even attempted to influence the behavior of the refineries causing the problem.
In a remarkable industry giveaway, the 2017 extension of cap-and-trade explicitly prohibits state and local agencies from regulating facility emissions at their source. This kneecapped the previous efforts of the California Air Resources Board and local air districts to set emissions reductions targets on specific polluters. This ban is not a necessary or typical component of cap-and-trade programs. The California State Legislature should repeal the ban, and grant state and local agencies the autonomy to regulate pollution in their own communities.
Some have argued that cap-and-trade, a market-based program, is best fixed through market-based solutions, such as by raising the price of carbon allowances or offsets. Yet we have already seen that these market-based mechanisms have failed to address pollution disparities at the local level. By introducing regulations, agencies can mandate emission reduction targets at specific sites, ensuring that the communities most impacted by facility emissions receive the full benefit of reduced pollution. While regulating emissions is likely to increase facility costs, and these costs can be passed to consumers, costs would be partially offset by avoided health consequences. Some studies have suggested that the economic benefits of avoided health consequences may outweigh the costs of pollution mitigation. While higher fuel costs would be shared by a broader share of the population than the concentrated subset experiencing increased pollution, let’s be honest about cap-and-trade’s current, regressive nature: the program is now subsidized not only by facilities purchasing allowances, but by low income communities and communities of color.
The ban on regulating facility emissions was passed less than three years ago, following heavy industry lobbying, suggesting that policymakers saw this provision as essential to ensuring the passage of the bill. However, cap-and-trade is now here to stay through at least 2030. Repealing the ban on facility regulations will not jeopardize the future of a program that has become an effective way to reduce greenhouse gas emissions.
As someone who worked for many years in Richmond, CA – home of the Chevron Richmond Refinery, and where asthma rates reach the state’s 99th percentile in some areas – I have come to believe that there is little more personal than the air that we breathe each day. The California Legislature should permit local agencies to regulate facility emissions and air quality in their own communities. Cap-and-trade is working for California. It is time to ensure that it is working for our local communities.
Alex Pfeifer-Rosenblum is a first-year MPP student at the UC Berkeley Goldman School of Public Policy.
The views expressed in this article do not necessarily represent those of the Berkeley Public Policy Journal, the Goldman School of Public Policy, or UC Berkeley.