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The cap and trade system |
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Cap and trade system also termed ‘allowance trading’ or ‘emission trading’ enable corporations to trade ‘emission allowances’, as long as they remain under a cap for emitting any particular pollutant. This approach which involves the market forces to effectively regulate environmental problems is preferred by economists.
In this cap and trade system, the government sets a limit of a particular pollutant an industry can emit into the environment. Emission allowances set by government may be traded between companies within the same industry. At the end of a year, a company must hold emission allowances equal to the number of pollutants it emits.
Total emission of an industrial unit increases with output and energy usage. Under the cap and trade system it is required to keep the total emission of pollutants within the specified limit in spite of increased production and energy usage. This limit must be set judiciously, so that some flexibility must be allowed for increasing production and simultaneously it must not be set too high to defeat the purpose of environment control.
Manufacturing units that can easily control emission of pollutants may sell their pollution credits to enterprises who find difficulty in regulating the same. Alternatively, these credits can be accumulated for use in future when production and consequently pollutant emission increases.
Cap and trade system is highly effective for controlling pollutant emissions which have a global impact. Carbon-di-oxide (CO2) emission is an ideal example of a pollutant that can be brought under cap and trade system. This gas, contributing significantly to greenhouse effect, has a comparatively more global impact than on a group of inhabitants. The cap and trade system has lesser impact on pollutants like mercury and sulphur-di-oxide (CO2) which create local damages.
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