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Summary 1: How a Cap and Trade System Functions
Abstract
In a cap and trade system, the ‘cap’ restricts how many GHGs can be released in a specified time period. This forces people to significantly reduce their GHG emissions. The cap is broken into a number of ‘emission units’. In a comprehensive cap and trade system, the total emissions in the economy can’t be greater than the total number of emission units.
The cap determines the environmental impact of the system. Trading creates flexibility in terms of where, how and by whom emissions are reduced. Emission units can be bought and sold. As long as the cap is not exceeded, it doesn’t matter where emissions are reduced. Flexibility is essential if we are to reduce our emissions at the lowest economic and social cost.
Citation
Motu Research. 2007. "How a Cap and Trade System Functions," Summary 1 from the series Introduction to Emissions Trading, produced as part of the Climate Change Policy Dialogue.
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