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  • Neev Mandot

How Cap-And-Trade Works

two birds, one stone

Harmful greenhouse gases are released into the atmosphere at massive scales by large corporations. About 100 companies have been responsible for about 71% of the world’s greenhouse gas emissions. With the recent emphasis on the preservation of our beloved planet earth, the government has put in place a unique program to incentivize the reduction of harmful emissions and the use of clean energy.


Here are some key details to help you better understand what cap-and-trade encompasses:

  • There is a cap implemented on companies, limiting how much greenhouse gasses they can release into the atmosphere

  • The cap is determined by the previous year's emission and decreases each year to eventually achieve zero-emission

  • Companies that don't reach their cap are able to trade their available carbon credit to other businesses who need in exchange for a market-rate price

  • If companies exceed their cap, they are heavily taxed by the federal government that are deposited into the state's Greenhouse Gas Reduction Fund

This program is more than just an environment-friendly initiative. Cap-and-trade allows the raising of capital by incentivizing the reduction of harmful emissions. The capital is raised by the auctioning of the carbon credits. It is difficult for smaller companies to invest in clean energy sources, whereas the large corporations that have access to extensive resources are able to shift to lower emission operations. These large businesses are the ones responsible for the majority of these harmful emissions.


The fascinating part is how the government has been able to set a limit on how much greenhouse gas can be emitted across the board. Yes, a company can exceed the cap, but the federal taxes are brutal. It is much more appealing to purchase carbon credits that are traded on secondary markets.


The cap-and-trade program was initiated in California in 2013. The state of California aspires to achieve 100 percent carbon-free electricity by 2045. California has the 4th largest cap-and-trade system in the world, making it one of the forerunners in the growth of low-carbon technologies being used in manufacturing plants.


More than 40 governments have placed a price on fossil fuels. With the increasing popularity of this program, we can expect more countries to adopt this model.


The cap-and-trade program limits emissions and puts a price on them. The ability to generate revenue from selling carbon credits incentivizes businesses to invest in cleaner energy sources, bettering our environment. Cap-and-trade is a relatively new concept, but in the coming decades, we will be able to see the large scale impacts it has on our harmful emission levels.



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