Cap & Trade is a widely applied governance principle. It is based on the assumption that free market forces will yield desired results at the lowest cost. Cap & Trade has been championed by market-oriented policy advocates as an effective approach for addressing climate change.
The Environmental Defense Fund html refers to this principle as
"our best shot, environmentally and economically, for curbing emissions that drive global warming."
# How does Cap & Trade work?
As the principle says, the idea is first to cap the general resource use and then to create the conditions for trading of resource use rights. If the cap doesn't work, the trading has no steering effect at all.
Step 1: Limits ("caps") on usage of a resource are set. These should be scienced based, but are often the outcome of political negotiations. Step 2: The state creates property rights for use of a given resource - for instance through certificates. These property-rights (certificates) are then allocated among existing users. Sometimes, they are simply given away (cf grandfathering). Step 3: The state also takes steps to create markets so that owners of usage rights - which are actually named "pollution rights" - can then trade them.
The Environmental Defense Fund explains html :
"This market – the 'trade' part of cap and trade – gives companies flexibility. It increases the pool of available capital to make reductions, encourages companies to cut pollution faster and rewards innovation."
According to the environmental economist Nathaniel Keohane wikipedia , Vice President of Global Climate
"Cap and trade lets the market find the cheapest way to cut emissions. html
What, if the basic assumptions are insufficient?
# Cap & Trade. Does it work? The atmosphere has been used for decades as a waste dump for greenhouse gas emissions. Therefore, the Cap & Trade approach has been applied to bring down greenhouse gas emissions. As the trade part allows companies to buy and sell allowances that permit them to emit, all depends on the question: How many allowances are out there. Government might distribute extra allowance when prices soar, which essentially means raising the cap, which essentially defeats its purpose. For example, the mandatory EU European Trading Scheme (ETS), which covers 12,000 factories in twenty-five countries, experienced a price collapse in 2006 when too many allowances were distributed, for free according to the grandfathering principle.
The policy is meant to give them a strong incentive to save money by cutting emissions but at the same time it reintroduces commoditization of what has not been tradable so far and it opens the door for "creative" trading of all sorts (see REDD, for corruption, concentration and new economic and social imbalances.
Therefore we prefer Cap & Share or Mutualize to the Cap & Trade approach. We do so also because: if the cap is imposed by bureaucracies or blind for the real carrying capacity of finite resources, it might be or not accepted by the people or simply ecologically useless (see fishery quota).
# Sources Jörg Haas & Peter Barnes: Die Atmosphäre als Gemeingut – Zukunft des Europäischen Emissionshandels, in Silke Helfrich & Heinrich Böll Stiftung (2009): Wem gehört die Welt. Zur Wiederentdeckung der Gemeingüter, pdf , p.229-236
Environmental Defense Fund: How Cap and Trade Works. html
Rakshina Narula, html