Solutions > Carbon trading >
Cap & Trade system
Cap & Trade is intended to provide a mechanism to encourage emitters of large amounts of greenhouse gas (GHG) to invest in changes that will reduce their emissions.
It can also provide a means to transfer some real wealth and sustainability to developing nations by means such as the Clean Development Mechanism (CDM).
How it works
In a Cap & Trade system, large emitter companies will be allowed to produce no more than a set amount of GHG emissions – a cap. The cap will be different for different industrial sectors and the cap must be reduced on a schedule so that overall emissions continually decrease. (1)
See Figure 1 below - At the end of each year, large emitter companies will report their emissions. They will then take action depending upon the level of those emissions relative to the cap:
Figure 1: Cap & Trade
Company 1 - Their actual emissions are less than the cap. Therefore, the amount of emissions less than the cap earns them permit credits that they can sell or trade.
Company 2 - Their emissions are more than the cap. So, they will need to either buy regulated emitters’ credits (such as those held by Company 1) or carbon offset credits.
top of page
Past success
Cap & Trade has been valuable in the past. It was first used in the US in the 1980s to reduce acid rain.
After 1990, Cap & Trade got global industry to dramatically and quickly reduce the production of ozone-depleting chemicals to shrink the “hole in the ozone”.
top of page
Canadian system
A federal plan will come into effect in Canada in 2010. (2) To comply with their GHG emissions reductions, large regulated industrial emitters must reduce their emissions from their operations and/or will be able to choose from the following:
- Buying credits directly from companies that reduced their emissions below their emissions cap
- Buying credits or offsets in domestic carbon markets
- Contributing to a technology fund - This contribution will be limited to 70% of emitters’ compliance needs in 2010 and will be reduced to zero by 2018.
- Buying offset credits under the Clean Development Mechanism (CDM). Access to these credits will be limited to 10% of each regulated emitters’ target.
- One-time credit for early action – Companies that took verified action between 1992 and 2006 to reduce their GHG emissions can apply for a share of a one-time credit.
NOTE: If the
American Clean Energy and Security (ACES) Act passes in the USA, it may result in changes to the Canadian system before it come into effect.
top of page
Issues
We need to be conscious of a number of factors that can reduce the effectiveness of Cap & Trade:
Back
Over-reliance
The ozone problem (See Past success above) involved a relatively limited number of companies dealing with manufacturing specific chemicals.
Greenhouse gases are much more pervasive, come from many more sources, and reducing them is much more complicated. The truth is, Cap & Trade, emission offsetting, and carbon sequestration can’t achieve our goal alone.
The real danger is over-reliance on any of these. If we treat them as “magic bullets” and let “them” do it for us, we will delay the emission reductions that each and every one of us must make. We need to massively reduce our greenhouse gas (GHG) emissions right now.
This means it's up to all of us to change our behaviour.
Back
Caps set too low
Emission cap levels are often set lower than the targets that science prescribes to bring about meaningful reduction in GHG emissions. (3)
There is a strong case that we don't just need to stop increasing CO2 in the atmosphere. We really need to reduce the concentration of CO2 to 350 parts per million. (4) (Its about 390 now.)
Emissions caps are set by governments who are under pressure from industry who don’t want their costs increased and who fear that customers (voters) will be upset with price increases.
Back
Intensity-based caps
There is a danger that intensity-based caps will allow overall GHG emissions to increase.
Intensity-based caps do not limit absolute emissions levels but are calculated based on emissions per unit of fossil fuel used. (5)
Therefore, it is possible for a large emitter to increase their overall emissions and stay under the cap as long as their emissions per unit of production decrease.
Back
Overhead
All of this validation and verification of carbon credits costs money – thousands per project. So, it is often impractical on a smaller scale (e.g. municipalities with small landfills or individual farmers)
