What is Cap and Trade?


In the 1990s, parts of the country were experiencing serious die-offs of trees and animals. Some buildings and various materials were degrading and needing maintenance sooner than expected. Waterways were becoming acidified, killing aquatic life. The culprit, it turned out, was “acid rain.”  Rainwater that normally has a pH of 5.6 (slightly acidic due to carbon dioxide dissolved in the water) was being measured at 4.2 to 4.4 (considerably more acidic).  This was recognized as a serious environmental threat to plants, animals, lakes, waterways, and human health.


The acidity was found to be a result of chemicals, sulfur dioxide and nitrous oxides, that were being emitted into the atmosphere, being absorbed by the water, and, returning to earth as rain. These chemicals were coming largely from coal burning.


A “Cap and Trade” scheme was proposed. Essentially, the government set a top limit for total sulfur dioxide and nitrous oxides emissions. It began as a fairly generous amount.  Then permits to emit this amount of pollution were sold or given to entities that produced this material. This was the “cap” part of it.

The “trade” side was that one plant could sell its permits to another. Company A could invest in technology to clean these chemicals out of its emissions and then make money by selling its permit to Company B. The second company would then be permitted a larger allowance of chemicals, at a cost, but  thetotalswould still remain below the cap target.

This offered an inducement to companies to invest in the clean technology and further created a market for the chemical cleaning technology. A company could offset the costs by selling its permit once the technology was up and running. Over time the amount of allowable emissions was reduced and more and more companies, following the market forces, invested in the new technology.

The amount of acid rain dropped precipitately. The scheme was highly successful because the industry could adjust to the needs of different plants and organizations more that with a firm regulation. There didn’t need to be all the typical exceptions and adjustments by government regulators. And the result was reported to be at least as fast as government regulation.

Cap and Trade for Green House Gases?

Some see this as an excellent market based solution for carbon emissions as well. Again, total acceptable emissions would be determined, permits issued and then companies could buy and sell the permits based on how quickly they move into non-carbon emitting technologies. As with acid rain, the total acceptable CO2 emissions would be reduced over time, giving power plants time to adjust to the changes.