Cap and trade

Cap and trade

Introduction

Cap and trade, also known as carbon trading is a market based approach which is used to control pollutions resulting from carbon emissions. This approach is usually mandated by the government and thus it involves the government giving out economic incentives for to industries which would encourage them to adopt necessary measures to dealing with carbon emissions. It is an environmentally policy tool which reduces carbon pollutant by generally placing a limit or cap on the total amount of pollutants that can be released by sources which are covered by programs and it mandates the government to give allowances to industries. It mostly works in the United States of America and was designed by president Barrack Obama as a way of reducing the overall effect of greenhouse gases. The world trade on the other hand means the exchanges related to the same. After the cap has been determined by the government, allowances are given to those companies which complied with this tool and since the cap shrinks every year, some companies can sell the unused allowances every year. This paper will therefore discuss how cap and trade has been used to reduce carbon pollution by pointing out its benefits and drawbacks.

The cap and trade is also known as a market system because through trading, it creates an exchange value for emissions and thus it uses some methodologies to achieve market economics. In the perfect competition market, the emissions which are produced represents a market failure which leaves a room for government based solutions. In order to prevent industries from creating more and more emissions and to incorporate the external costs resulting from emissions or pollutions, the cap and trade intervenes by creating a higher cost of production which makes it expensive for industries to produce such emissions as compared to other production processes. This cost is relatively high even as compared to tax payers or other third parties. Through assigning of monetary value, the government encourages households and other firms to adopt the strategy of cleaner technologies which will be associated with greener practices.

There are various reasons as to why countries such as the United States of America adopted the cap and trade legislation. One of the main reasons for the imposition of this strategy is to reduce effects of global climate change as well as facilitating economics in the industries through the provision of incentives. The cap and trade Is a friendly method as compared to the carbon tax strategy because it limits atmospheric pollution by using positive measures of preventing pollution. The environment ought to be kept clean and therefore global warming and greenhouse effects had to be curbed through positively encouraging households and industries. Other alternatives for controlling greenhouse gas emissions is by the use of command and control legislation or imposing a carbon tax.

There are various advantages associated with the use of cap and trade as a strategy to reduce on carbon emissions. One of the main advantages for the same is its efficiency. Companies which can reduce their emissions at low costs can sell their emission credit to those companies which do not. Another benefit is that, the government is in a good position to get revenue from the same practice and this is obtained through the auctioning of credit cards. On the part of environment, cap and trade is a tool that has ensured environmental cleanliness by reducing to a larger extend those elements of carbon from the atmosphere.

Conclusion

In conclusion, the cap and trade has been a very effective tool in promoting a clean environment in most countries especially in Unites states of America. Although the government is spending much on the provision of incentives and allowances, the benefits from the same are a multitude of kind.  We have found out that there is market efficiency associated with the same as well as creation of revenue to the government. However, this strategy which is an alternative of carbon tax has some drawbacks. According to Larry Lohman, cap and tax has encouraged industries related to coal or oil to carry more of the practice because they are in a position to undertake the credit card trading and obtain returns. Again, this method also encourages companies to cheat and evade tax. Finally, although all these methods have been put in to place to reduce carbon pollution, the best method to ensure the same is a change in the human action towards the environment.