Understanding Emissions Trading or Cap and Trade Systems For Emissions Reduction

What Are Cap and Trade Emissions Trading Schemes
When Do Cap and Trade Schemes Work
Pros and Cons of Cap and Trade Emissions Reduction Schemes


Emissions trading schemes or 'cap and trade' schemes, as they are sometimes called, are defined by the US EPA as "an environmental policy tool that delivers results with a mandatory cap on emissions while providing sources flexibility in how they comply. Successful cap and trade programs reward innovation, efficiency, and early action and provide strict environmental accountability without inhibiting economic growth". But what does this really mean, how do they work and what are the pros and cons of emissions trading schemes.

What Are Cap and Trade Emissions Trading Schemes

In a cap and trade ystem for emissions, the government sets a limit to the permissible amount of emissions. This limit is known as a cap, is flexible and is expected to be lowered with time. Depending on the particular system implemented, companies that pollute and cause those emissions can either buy emissions allowances or credits or are given them by the government. The companies can then trade those emissions credits against their emissions or pollution. The choice is then with the company to either trade all their credits and continue polluting at their current level or to implement new procedures and equipment to reduce their emissions. If they reduce their emissions, they don't need all their emissions credits and can then on sell them to other companies. In this way reducing emissions becomes more financially prudent for the company than to continue polluting.

When Do Cap and Trade Schemes Work

Cap and Trade systems don't fit all forms of pollution. They are best suited to bringing about reductions in emissions when the emissions come from numerous sources and cause global rather than local problems. For this reason cap in trade systems for carbon trading tend to work well. The main greenhouse gas, carbon dioxide, causes few problems local to where it is emitted but is causing big problems from a global perspective.

The US EPA says that cap and trade systems are is best used where:

  • Emissions have longer residence times
  • The environmental and/or public health concern has broad geographic impacts
  • A significant number of sources are responsible for the problem
  • The cost of controls varies from source to source
  • Emissions can be consistently and accurately measured
  • Strong regulatory institutions and financial markets exist

Pros and Cons of Cap and Trade Emissions Reduction Schemes

Cap and trade emissions reduction schemes have been used for various emissions reduction programs for decades. Some pros and cons are given below.


  • Shinking emissions caps guarantee that specified emissions reductions targets will be met
  • Can produce revenue that can be used to help others to reduce their emissions, enhance the exisiting program or bring about faster emissions reductions.
  • Encourages rapid adoption of cheap and efficient means for bringing about the largest emissions reductions.
  • Increases the value of using new, cleaner companies and technologies rather than maintaining use of historic polluters
  • Cap and trade systems have been extensively used in the past and have proved successful


  • Prices of emissions credits can be volatile with large price swings.
  • Systems can become complex and cumbersome with large amounts of compliance administration
  • Cap and trade systems are best implementaed at a regional or national level
  • Polluters can be rewarded for past polluting while new, clean technologies don't get such a windfall

Source: AZoCleantech

Tell Us What You Think

Do you have a review, update or anything you would like to add to this article?

Leave your feedback
Your comment type

While we only use edited and approved content for Azthena answers, it may on occasions provide incorrect responses. Please confirm any data provided with the related suppliers or authors. We do not provide medical advice, if you search for medical information you must always consult a medical professional before acting on any information provided.

Your questions, but not your email details will be shared with OpenAI and retained for 30 days in accordance with their privacy principles.

Please do not ask questions that use sensitive or confidential information.

Read the full Terms & Conditions.