Cap and Trade SchemesSyllabus: Evaluate, using diagrams, possible government responses to threats to sustainability, including legislation, carbon taxes, cap and trade schemes, and funding for clean technologies.
Explanation: A cap (upper limit) and trade scheme is a market-based approach to reducing carbon emissions through financial incentives. Corporations or national governments are permitted to trade emission allowances under an overall cap, or limit, on those emissions. Fines are imposed for producers exceeding those limits, while producers operating below their carbon limits can sell or "trade" their spare allowance to companies that are operating above the limits.
Cap and trade schemes set specific limits on GHG emissions for countries and organisations. They promote the trading of emissions allowances between emitters, who can meet the cap efficiently and those who face more of a challenge in reducing emissions.
The choice between environmental taxation and cap and trade schemes to address climate change has generated considerable discussion with impassioned arguments on both sides.
Taxation has the advantage that it can be implemented by individual governments without international agreement, but, environmental taxes have dead-weight losses in addition to their beneficial effects in addressing externalities. It is also argued that establishing a price for GHGs through cap and trade schemes has the advantage of providing some certainty about reductions in quantities of emissions and creates a market to achieve the climate change mitigation target at the lowest cost.
The following article outlines the advantages and disadvantages of cap and trade schemes compared to environmental taxes as a means of reducing emissions.
Cap and trade schemes vs. Carbon tax
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Carbon pricing has a double climate effect - it's a huge source for revenue, but also gives the right incentives for reducing emissions by making it expensive to pollute.
Norwegian Prime Minister Jens Stoltenberg