Cap and Trade
As society focuses on tackling the challenges of greenhouse gas emissions, market-based solutions have emerged as a means for reducing emissions in the most economically efficient manner, i.e. at the lowest possible cost. Cap-and-trade programs cap the levels of emissions for a particular sector of the economy, but provide compliance flexibility to capped facilities in order to contain costs. Two main products are often used in these programs – allowances and offsets.
Allowances (or permits) are tradable units that represent the right to emit a specific volume of a particular pollutant. They represent the currency of a cap-and-trade program. Initially, a quantity of allowances equal to the size of the cap is distributed by a regulatory body into the market either through allocation, by auction or a combination of both. Subsequently, allowances can be bought and sold under the cap-and-trade program. Facilities need to ensure they have sufficient allowances to submit for every compliance period.